‘Broader and more impactful than CSRD’: transition plans in the EU’s new due diligence rules
Political negotiations resumed last week on the Corporate Sustainability Due Diligence Directive with general agreement on the need for transition plans
Many consider Corporate Sustainability Due Diligence Directive to be Europe’s first real attempt to change how companies manage their overall environmental and social impacts, rather than simply getting them to disclose existing behaviour or limit particular activities.
It’s uncertain what will emerge from the negotiations (there are two more major trialogues scheduled between now and November), but transition plans are on the wish lists of all three EU bodies, so they’re basically guaranteed to be included in the final Directive.
The original proposal tabled by the European Commission includes a requirement for companies to “adopt a plan to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5°C.”
It calls for those plans to address the link between executive pay and “long-term interests and sustainability”.
According to documents from June, the European Council sticks pretty closely to the Commission’s position in its proposal. However, it wants the language changed to mirror the Corporate Sustainability Reporting Directive and European Sustainability Reporting Standards’ requirements for transition plans: it namechecks the same criteria around coal and gas disclosures and the need for investment plans, for example.
And it wants the clause about pay deleted from the law.
The documents show that European Parliament also wants to base transition plan requirements in CSDDD on what’s laid out in CSRD.
In addition, it is pushing for risks and opportunities to be an explicit focus of the law, rather than just decarbonisation, calling for disclosures on “the resilience of the company’s business model and strategy to risks related to climate matters” as well as information about business opportunities arising from the transition.
Parliament also thinks shareholders should have to approve sustainability-linked pay packages at annual meetings and, crucially, wants it made clear that transition plans under CSDDD should cover the full value chain.
“The CSDDD rules are expected to cover upstream and downstream activities, because it’s about being accountable for your value chains,” says Richard Gardiner, head of EU policy at sustainability-focused non-profit World Benchmarking Alliance.
“That makes the transition plan component much broader and more impactful than what’s talked about in the Corporate Sustainability Reporting Directive.”
Focus on action not outcomes
Unsurprisingly, there has been plenty of pushback against the proposals already, with some of the most aggressive lobbying understood to be coming from US trade bodies and the asset management industry.
Insiders say that, on the transition plan requirements, French companies are particularly animated. Many are arguing that, given that CSDDD contains civil liability provisions, they would end up being held legally liable if they fail to achieve the transition to net zero, even though it’s not fully within their control.
But, says Gardiner, “neither NGOs nor policymakers are calling for that”.
Rather than results, the liability provisions in CSDDD proposals are linked to action: the Parliament proposals say directors should be held responsible for “overseeing the obligations” laid out in the transition plan.
In other words, a company would be obliged to demonstrate that it had made credible efforts to pursue a transition to a low-carbon economy (as per its stated transition plan), but not be held responsible for the outcome of those efforts.
“The rules simply ask for companies to have a robust strategy that can be challenged by supervisors and other stakeholders,” Gardiner adds.