EU firms under pressure to enhance climate transition plans as CSDDD passes
New EU rules could trigger fines for firms with insufficient climate transition plans legal experts warn
After months of the tense negotiations, the Corporate Sustainability Due Diligence Directive (CSDDD) has received the backing of a majority of member states in the European Council.
The new rules are set to impose tougher requirements on climate transition planning, companies are now under pressure to prepare in order to avoid fines, legal experts warn.
Firms that have been laggards on climate transition planning may now be under pressure to clean up their act, as the EU’s CSDDD has passed a critical hurdle last week. The directive now has to be signed off by the European Parliament in April. It will then be implemented by the individual member states.
Once in place, the new rules could become a significant accelerator of climate transition planning, predicts Nicolas Lockhart, partner at Sidley. “These due diligence rules go further than the EU’s ESG disclosure rules. The disclosure rules require companies to be transparent about their ESG risks and impacts but they don’t require actions to address them. It’s about transparency not behaviour change. The due diligence law will require companies to take action to improve ESG outcomes. It is about both transparency and behavior change” he stressed.
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The new rules apply to all companies selling to the EU, even if they have no place of business in the Union, explains Lockhart. "This has been controversial but is seen as important to level the playing field for all companies selling in the EU.”
“In view of the new, far-reaching obligations and risks under the CSDDD and their interplay with reporting obligations under the CSRD, companies are well-advised to plan ahead” adds Julia Grothaus, Litigation, Arbitration & Investigations partner at Linklaters.
Companies failing to put in place transition plans that align with the Paris Agreement could now face fines of up to 5% of their annual turnover. The sectors mot impacted by the new rules could be the energy and utilities sectors which not only have the highest level of Green House Gas Emissions, but also have a relatively low decarbonisation rate, according to JP Morgan’s Carbon Transition Score.
Potential snags
But there are some potential snags to the implementation of the new rules which have been vehemently opposed by the German government among others. One is that the threshold for having to meet CSDDD requirements has been lifted from €300m to €450m, in a bid to win over countries that had previously been on the fence such as France and Italy.
This in turn has reduced the number of companies who have to meet the new CSDDD requirements by almost 70%, according to research by SOMO and Euractiv. While the draft rules proposed in December would have applied to more than 16,000 companies, they now apply to just over 5,000 firms.
Moreover, the financial sector has initially been excluded from the new rules, a move which has been criticised as “a major shortcoming” by campaign group SOMO. Joseph Wilde-Ramsing, advocacy director at SOMO argued that this was out of line with leading international standards on business and human rights.
“The European Commission has committed to developing a separate due diligence directive for the financial sector – the Commission would be well advised to make haste with this, lest it be too little, too late” he stressed.
Enforcement challenge
Another potential challenge could lie in the enforcement of the new rules. Many corporations are acutely aware that EU fines can be significant. For example, Apple has recently been fined €1.8bn for breaches to EU competition law.
However, unlike competition law, which is enforced by the Commission directly, CSDDD is a directive and therefore has to be implemented by member states. They are also the first port of call when it comes to enforcing the rules. Given the reluctance of some states to vote for CSDDD in the first place, it remains to be seen how likely they will be to hit their national industry with fines.
That being said, the Commission has also pledged to set up a European Network of Supervisory Authorities that will bring together representatives of the national bodies in a bit to ensure a coordinated approach towards enforcement.
