The EU may soon extend its requirements for climate transition plans through the ongoing development of a corporate sustainability due diligence directive. However, the final version of the directive presents three key issues that need to be addressed to ensure an effective transition plan, writes Romain Hubert.
Romain Hubert is project manager in finance at the Institute for Climate Economics (I4CE).
Negotiations are underway on the Corporate Sustainability Due Diligence Directive, commonly known as the “CSDDD”.
Regarding climate, an obligation for companies to adopt a climate transition plan is being discussed. But let’s keep careful on this point.
Europe is in the process of developing climate transition plan requirements in two other directives – on corporate sustainability reporting (CSRD) and on prudential requirements for banks (CRD).
We must therefore ensure that the discussions result in a final version of the CSDDD that is consistent with these other texts and at the same time complementary.
The importance of corporate climate transition plans
Before coming back to the issues of consistency between all these directives, a quick reminder on climate transition plans.
It is a roadmap where the company may detail its strategic objectives, targets and actions to align its activities with the objectives of the Paris Agreement, that is, limiting global warming below 1.5°C to 2°C.
The credibility of the transition plan reflects how serious the company really is in its effort to do its share in limiting global warming.
The EU first introduced the transition plan concept with the Corporate Sustainability Reporting Directive, the CSRD. It requires companies to disclose from 2025 their transition plan – if they have a plan.
But it does not ensure that companies will effectively prepare a credible plan and that they will implement it.
Holding companies accountable for their commitments
This is where the CSDDD can make a difference. If the final version of the directive reflects the most ambitious proposals put on the table so far, it will force companies not only to prepare a credible transition plan but also to actually implement it.
More importantly, it will expose them to sanctions if they fail to do so. Two types of complementary sanctions are proposed: the first involves the company’s civil liability before the courts; the second involves an administrative authority that can impose, for example, pecuniary sanctions.
However, there is still a lot of uncertainty about how ambitious the final text will be. This calls for several points of attention for the negotiation process of the directive.
The first point of attention is that the text must clearly formulate both the obligation to implement a plan and the applicable sanctions.
At this stage, the obligation to implement the transition plan only appears in some of the Parliament’s interim discussion documents.
Moreover, the directive currently provides for sanctions on a wide range of environmental and human rights issues, but their application to climate is yet to be clarified.
Specifying the essential points of a credible transition plan
A second point of attention: if the directive seeks to hold companies accountable for their transition plans, a prerequisite is to clarify what companies can consider to be a sufficiently ambitious plan.
Thus, the directive must specify certain essential characteristics of a transition plan, which have already been identified in the CSRD, and which appear in few versions of the CSDDD currently under discussion.
A first key characteristic is the scope of activities that the company takes into account when establishing its strategy.
It must cover the entire value chain. If instead for example the use of the products is excluded, as the Council and Commission seem to propose, the plan would be meaningless.
In the case of a car manufacturer, it would indeed be strange to build a transition plan without taking into account the emissions from the use of the vehicles sold.
It would be equally strange for a financial institution to omit the emissions from the activities in which it invests, as these represent the bulk of its contribution to global warming.
Some other characteristics should be specified. For example, the company’s strategy must be calibrated with reference to the 1.5°C global ambition.
A credible plan must also comprise interim targets, as they are necessary to limit the risk of indefinitely delaying efforts to decarbonise the production system and the value chain.
The company must also demonstrate it is putting the necessary resource into implementing the plan, particularly in terms of investment.
In short, the CSDDD needs to take the CSRD’s approach to transition plan as a model. By doing so, the CSDDD would also secure a comprehensive approach to transition plans that has not yet been achieved in the discussions on the CRD targeting banks.
It would indeed emphasise the importance of reducing climate impact, in addition to addressing the implications of the transition in terms of managing financial risks.
If the directive is not consistent with the CSRD, not only are the sanctions ineffective, but it also opens the door to the temptation of greenwashing.
Ensuring the relevance of the scope of companies concerned
The third point of attention is the scope of companies covered by the directive. Today, it is still unclear which companies will be concerned.
Logically, the scope should be aligned with that of the CSRD. This would mean that the same companies would have to both publish a plan and implement it. This would also help to better integrate financial institutions into the scope of the CSDDD.
The CSDDD can be a game-changer for transition plans, for it would introduce mandatory implementation and sanctions. But that means at least addressing these three attention points.
For the moment, the perspectives of the Commission and the Council remain unclear. It remains to be seen whether the Parliament will tackle these points: the Committee on Legal Affairs in charge of the file plans to vote on its position on 25 April before bringing it to the plenary in May.