In 2018, when the Dutch NGO Milieudefensie/Friends of the Earth Netherlands requested Royal Dutch Shell’s CEO to formulate a climate plan, this was perceived as an unusual move. A compulsory climate action plan was not on many companies’ agenda.
Following a significant victory against Royal Dutch Shell in 2021, which ordered Shell to reduce its emissions, these NGOs took their mission further and sent letters to the CEOs of 29 other multinational companies, demanding emission reduction plans in line with the 2030 targets.
Fast forward to February 2022, the European Commission unveiled its draft Corporate Sustainability Due Diligence Directive, also known as the EU Supply Chain Directive. The Directive makes it mandatory for corporations to conduct due diligence measures, not only within their own operations, but also in their value chains. This due diligence covers a company's human rights and environmental impacts. Interestingly, it also introduces a new requirement for large companies to adopt a climate plan. Some consider this duty, therefore, the European legislator’s direct response to the Dutch Shell judgement, reflecting a growing focus on climate change regulations for companies.
This blog post focuses on the potential implications of this climate plan requirement outlined in Article 15 of the draft CSDDD.
The climate plan evolution in EU legislation
The obligation for companies to adopt a climate plan was already included in the first draft of the CSDDD, presented by the European Commission a in February 2022. This plan was meant to ensure that a company’s strategy aligns with a sustainable economy and aims to limit global warming to 1.5°C, in line with the Paris Agreement.
The amended draft adopted by the European Parliament on 1 June 2023 refined these requirements significantly. If the current draft enters into force, companies will need to develop a transition plan to ensure that their business model and strategy align with climate neutrality objectives, including the 2050 neutrality target and the 2030 climate target. The latest proposal also includes detailed criteria for this transition plan, requiring a description of:
- the resilience of the company’s business model and strategy to risk related to climate matters;
- how the company’s business model and strategy take account of the interests of the company’s affected stakeholders and of the impacts of the company on climate change;
- the role of the administrative, management and supervisory bodies with regard to climate matters; and
- how the company’s strategy has been implemented and will be implemented with regard to climate matters, including related financial and investment plans and the time-bound targets related to climate change set by the company for scope 1, 2 and, where relevant, 3 emissions and emission reduction targets. The reduction of scope 3 emissions (the emissions a company is indirectly responsible for) up and down a value chain poses a complex challenge. Companies will need to audit these emissions carefully and collaborate with their suppliers to reduce them.
In addition, the EU Parliament draft aligns more closely with the reporting requirements in the Corporate Sustainability Reporting Directive (CSRD) which set out reporting rules in line with the Paris goals and the objective of achieving climate neutrality.
Who is required to make a climate plan?
The EU Parliament draft lowers the threshold for companies required to establish transition plans for climate neutrality. The obligation would apply to EU companies with more than 250 employees on average and a net worldwide turnover exceeding €40m in the previous financial year, as well as companies not reaching these thresholds but are the ultimate parent company of a group with 500 employees and a net worldwide turnover of more than €150m in the previous financial year.
For companies founded under the laws of a third country, the requirement kicks in if the company had a net worldwide turnover of more than €150m, with at least €40m generated in the EU, or if the company is the parent company of a group with these figures and 500 employees.
How can the climate plan requirement be enforced?
Should the CSDDD be adopted with a climate plan obligation, the question of its enforceability arises. Can private citizens or NGOs take legal action against companies for not adopting or not complying with their climate plans?
The Parliament draft provides for an extension of the measures for public enforcement. Member states must designate authorities to supervise compliance with all obligations transposed into national law pursuant to the Directive (Article 17). This goes far beyond the initial draft, which allowed supervisions only regarding the mere set up of a climate plan but did not encompass the substance of the plan or its compliance with the Paris Agreement and the GHG emission reduction goals. It remains to be seen in the further legislative process how the scope of supervision will eventually be defined.
Whereas the Commission draft only allowed for pecuniary sanctions, the Parliament draft includes a range of potential sanctions in Article 20 para (2a), including the use of publishing a statement indicating that a company is responsible and the nature of the infringement (“naming and shaming”), ordering the company to cease the conduct constituting the infringement or suspending products from free circulation or export.
Pecuniary sanctions shall be based on the company’s net worldwide turnover. The maximum limit of pecuniary sanctions that the member states adopt shall be not less than 5 per cent of the net worldwide turnover of the company in the business year preceding the fining decision.
Moreover, Article 24 para (1) of the Parliament draft introduces an indirect sanction or reward mechanism, making compliance with the CSDDD or – adversely – their voluntary implementation, a factor in public support and the award of public contracts and concessions.
The EU Parliament draft aims to grant affected parties access to justice and legal remedies for corporate failure to comply with the CSDDD. According to Article 22 of the Parliament draft, companies can be held liable for damages if
- they failed to comply with an obligation of the directive and
- the resulting damage should have been identified, prioritised, prevented, mitigated, brought to an end, remediated or its extent minimised by the measures laid out in the directive.
While the initial version of Article 22 covered only the due diligence obligations under Article 7 and 8 for civil liability, the latest Parliament version extends the liability more generally to a failure to comply with “an obligation laid down in this directive”. If this particular draft amendment survives the legislative process, it is to be expected that NGOs will argue that Article 22 provides for civil liability if companies do not fulfill their climate plan obligations pursuant to Article 15.
However, such an argument would not be supported by the wording and intention of Article 22: The concept of “adverse impact”, a requisite for civil liability according to Article 22, is explicitly confined to environmental and human rights impact and is expected to be addressed by companies through their due diligence efforts outlined in Articles 4 to 11. Similarly, the notions “identification, prioritisation, prevention, mitigation, ending, remediation, or minimisation” are inherent to these obligations, but are noticeably absent in the wording of the climate plan obligation. Consequently, the changes in the Parliament draft create consistency by ensuring civil liability in connection with all provisions related to companies' due diligence rather than expanding the civil liability to the climate plan obligation of Article 15.
Another element to ensure compliance with the CSDDD is the obligation for managers to take climate targets into account in their decision-making. While a general directors’ liability, initially outlined in Article 26 of the draft CSDDD, has not been adopted by the Parliament, it proposes adding a third paragraph to Article 15, requiring that directors are responsible for overseeing the climate plan obligations.
In addition, in companies with more than 1,000 employees, the directors’ variable remuneration is tied to achieving the transition plan targets.
Further, Article 25 para (1) of the CSDDD draft states that directors must consider the consequences of their decisions for sustainability matters in the short, medium and long term when fulfilling their duty to act in the best interest of the company. Directors can also be held liable for their compliance with this provision, as member states shall ensure that their regulations regarding the breach of directors’ duties extend to the provisions of Article 25. If this regulation is adopted, it is to be expected that NGOs will increasingly scrutinise directors and use litigation to hold them accountable for (perceived) non-compliance with the CSDDD – similar to the case of Client Earth v Shell’s Board of Directors, which was recently rejected.
Outlook – A climate-ready corporate future
With three different draft versions, and the official negotiations between the Parliament, the Council and the Commission (“trilogues”) ongoing, the final CSDDD may not emerge until early 2024. Member states will have two years to adopt necessary regulations after the Directive comes into force (see Article 30 para (1) of the draft). Corporations will need to comply with the Directive three-to-four years after its entry into force, depending on their size and turnover.
While the extent of the corporation’s and its leaders’ liability for an inadequate climate plan may be subject to debate in the legislative process, the obligation itself has remained steadfast. Therefore, already now the CSDDD’s climate plan requirement marks a notable shift in corporate responsibility governance.