CSDDD revisited; an update on the EP’s amendments

On 1 June 2023 the European Parliament (“EP”) adopted significant amendments to the EC proposal for a Corporate Sustainability Due Diligence Directive (“ECP”), submitted on 23 February 2022. The Corporate Sustainability and Due Diligence Directive (“CSDDD”) aims to promote responsible business conduct. Its twin sister, the Corporate Sustainability Reporting Directive (CSRD) aims to ensure corporate high-quality reporting on sustainability matters. This includes a requirement for certain companies to report their climate transition plan in the management report of their (consolidated) annual financial statements. The basis for having a climate transition plan (“Climate Plan”) is laid out in Art. 15 CSDDD. The EP Amendments reinstate and strengthen certain ECP provisions: broadening the scope of application to (non-EU) companies, leaving out a double materiality condition for the duty to adopt a Climate Plan, topping up its content requirements and re-introducing the remuneration provision. In this UCALL Blog we discuss these EP Amendments.

On 28 November 2022 the Council reached a Political Compromise (“PC”) text proposed by the Czech Presidency of the Council. It significantly reduced the reach and impact: stripping climate plan-related remuneration provisions and director liability amongst others. According to the Member States the CSDDD should respect ‘the variety of corporate governance systems and the freedom of companies to regulate their internal matters’.

In the English-language April 2023 special of Ondernemingsrecht dedicated to the CSDDD, we already wrote extensively on the Art. 15 CSDDD provision: ‘The Corporate Climate Transition Plan: How to Ensure Companies are Paris-Proof’. A couple of our suggestions for improvements in this Contribution seem to have been addressed by the EP Amendments: addressing the scope of application and overlap between CSRD and CSDDD (par. 2 of our Contribution); including the Paris Agreement in Annex I, part II and thereby defining climate change as an adverse environmental impact (par. 3 of our Contribution); keeping a link between a company’s Climate Plan and its variable remuneration policy (par. 4 of our Contribution); and enhancing the public authority’s supervisory powers regarding the Climate Plan (par. 6 of our Contribution). The say on climate for shareholders as suggested by us (par. 5 of our Contribution) and taken over in the Report submitted by the Committee on Legislative Affairs was not adopted by the EP.

Scope of the Directive

The original scope of application (Art. 2) distinguishes 3 categories of companies:

1. EU Companies with more than 250 (ECP: 500) employees and a net worldwide turnover of more than EUR 40 (ECP: 150) million;
2. EU Companies not reaching these thresholds but being the ultimate parent company of a group with 500 employees and a net worldwide turnover of more than 150 million (ECP: 250 employees and EUR 40 million respectively, provided that at least 50% of this net turnover was generated in ‘high risk’ sectors (textile/clothing industry, agriculture, mining etc);
3. Non-EU Companies when;
   • generating a net worldwide turnover of more than EUR 150 million, provided that at least EUR 40 million generated in the EU, including turnover generated by third party companies with whom the company and/or its subsidiaries has entered into a vertical agreement in the EU in return for royalties; or,
   • not reaching these thresholds but being the ultimate parent company of a group fulfilling the same conditions as mentioned under b).

The Commission’s proposal for Article 15 CSDDD merely obliges ‘large’ companies to adopt a Climate Plan. The EP Amendment would change the Directive to require all categories to adopt and implement a transition plan in line with the reporting requirements in Article 19a CSRD concerning the management report, ensuring that its business model and strategy is Paris-proof.

All companies to adopt and implement a transition plan

Content of the transition plan

One of the CSDDD’s ambitions is to ensure by law the transition of companies to a sustainable and Paris-proof business model and strategy. Neither the Commission proposal, nor the Political Compromise set any concrete emission reduction goals. This would leave companies ample room to set their emission reduction objectives on their own and even includes the option for some companies to omit greenhouse gas (“GHG”) emission reduction objectives in their Climate Plans. The EP Amendment however adds the requirement that this Climate Plan includes a description of:

a) the resilience of the company’s business model and strategy to risks related to climate matters;
b) the opportunities for the company related to climate matters;
c) where appropriate an identification and explanation of decarbonisation levers within the company’s operations and value chain, including the exposure of the company to coal-, oil- and gas-related activities;
d) 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;
e) how the company’s strategy has been implemented and will be implemented with regard to climate matters, including related financial and investment plans;
f) the time-bound targets related to climate change set by the company for scope 1, 2 and, where relevant, 3 emissions, including where appropriate, absolute emission reduction targets for greenhouse gas for 2030 and in five-year steps up to 2050 based on conclusive scientific evidence, and a description of the progress the company has made towards achieving those targets;
g) a description of the role of the administrative, management and supervisory bodies with regard to climate matters.

Note that these added reporting requirements (except for the provisions under c) and f)) show significant overlap with the reporting duties already enacted in Art. 19a/29a CSRD. This is relevant, as the draft European Sustainability Reporting Standard (ESRS) E1 – Climate Change (“ESRS E1”) – yet to be adopted by the European Commission – does set standards to fulfil the CSRD Climate Plan reporting obligation. ESRS E1 requires the inclusion of emission reduction objectives, as pointed out in our Contribution in Ondernemingsrecht. Additionally, the EP’s proposal of stripping of Article 15(2)’s double materiality condition (albeit only in case climate change is or should have been identified as a principal risk for, or a principal impact of, the company’s operations, the company must include emission reduction objectives in its plan) would increase the alignment between CSDDD and CSRD. Consequently, following the EP Amendments all Article 2-companies are required to adopt concrete emission reduction goals.

Adverse environmental impact

The definition of ‘adverse environmental impact’ refers to a list of (EU) laws or international treaties listed in Part I and Part II of the Annex (Art. 3(1)(b) CSDDD as EP Amended). By Amendment 377 the EP included the Paris Agreement in Annex I, part II, as suggested in our Contribution. Thereby climate change itself qualifies as an adverse environmental impact and falls thus under the scope of a company’s due diligence obligations (art. 6 – 8 CSDDD) to identify, prevent and bring to an end adverse environmental impacts.

On director remuneration and climate plans, the ECP requires companies to duly take into account the fulfilment of these obligations when setting variable remuneration, if variable remuneration is linked to the contribution of a director to the company’s business strategy and long-term interests and sustainability. The PC stripped this provision entirely. The EP Amendment brings some of this back, as it provides that directors are responsible for overseeing the obligations set out in this Article 15, and that companies with more than 1000 employees on average have a relevant and effective policy in place to ensure that part of any variable remuneration for directors is linked to the company’s transition plan referred to in this Article. Such a policy shall be approved by the Annual General Meeting (AGM). It establishes a governance issue by prescribing director responsibility for overseeing the Climate Plan, i.e. this is so for all Art. 2 Companies. This director responsibility should not be controversial from a corporate governance point of view; directors are to set and implement a company policy and (business) strategy including a Climate Plan.

Director responsibility should not be controversial

Secondly, it contains a remuneration provision with its own scope of application (> 1000 employees), and governance provision (AGM approval for the remuneration policy). The core of the obligation is rather non-prescriptive: ‘part of any remuneration for directors should be linked to the climate plan. We think it would be better to separate these two issues (director responsibility and remuneration) in two paragraphs because of the different scope provision. This would enhance the readability of the CSDDD provisions.

Enforcement

Concerning the enforcement of these climate plans, it should be noted that the EP Amendments strip the provision adopted by the PC in Art. 18 limiting the supervisory authority’s power (vested in public law) is restricted to ensuring companies adopt a plan at all.. This Amendment means that the public supervisory authority has the full scope of supervisory powers prescribed by the CSDDD to ensure the Climate Plan is CSDDD-compliant, as suggested by us in our Contribution. Furthermore, the civil liability provision of Art. 22 CSDDD is in the EP Amendment applicable to the Climate Plan as well. This means that Article 2-companies can be subject to civil liability claims regarding their Climate Plan by concerned private parties like Client Earth, Milieudefensie, Urgenda, Greenpeace etc.

It is very welcome that the EP as co-legislator proposes to introduce a paragraph concerning remedies available to these private parties. Many EU Directives and Regulation provide for civil liability provision. However, it is very rare, despite its need, in EU legislation to find stipulations for civil remedies to made available in case of liability.

The EP Amendments propose to add a paragraph in Art. 22 with a duty for Member States to provide

1. that the limitation period for bringing actions for damages is at least ten years and measures are in place to ensure that costs of the proceedings are not prohibitively expensive for claimants to seek justice;
2. claimants are able to seek injunctive measures, including summary proceedings. These shall be in the form of a definitive or provisional measure to cease an action which may be in breach of the CSDDD, or to comply with a measure under the CSDDD;
3. measures are in place to ensure that mandated trade unions, civil society organisations, or other relevant actors acting in the public interest can bring actions before a court on behalf of a victim or a group of victims of adverse impacts, and that these entities have the rights and obligations of a claimant party in the proceedings, without prejudice to existing national law;
4. when a claim is brought, that a claimant provides elements substantiating the likelihood of a company’s liability under the CSDDD and has indicated that additional evidence lies in the control of the company, courts are able to order that such evidence be disclosed by the company in accordance with national procedural law, subject to the EU and national rules on confidentiality and proportionality.

The CSDDD’s destiny is at the moment in the hands of the three main players at the EU level (Council, Commission and EP) in the so-called trialogue. It is expected that at the beginning of September 2023 this dialogue will result in a final compromise text.

This post was co-authored with prof. dr. Manuel Lokin.