Net-Zero Plans under the Proposed CSDD
One important feature of the proposed Directive on corporate sustainability due diligence is the obligation of companies to adopt so-called ‘net-zero plans’. Article 15 of the proposed directive provides that certain companies ‘shall 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 in line with the Paris Agreement. This plan shall, in particular, identify, on the basis of information reasonably available to the company, the extent to which climate change is a risk for, or an impact of, the company’s operations’.
This part of the directive stands out on several fronts. First, different from the other parts of the directive, net-zero plans are concerned with climate change alone, and not ‘sustainability’ more generally. Secondly, the obligation to draw up such a plan is limited to the largest firms covered by the proposed directive, namely the so-called ‘group 1’ companies (mentioned in Article 2(1)(a) and 2(2)(a)).
Secondly, a subset of those companies will have to include specific emission reduction objectives in their plan. This will be applicable to situations where climate change is identified as a ‘principal risk’ for the company’s operations or a ‘principal impact’ of them (Article 15(2)). The text of the proposal remains a little unspecific here; also, it is important to point out that the targets even under the Paris Agreement itself remain notoriously vague. How they can be translated into concrete targets is not yet clear.
Finally, as a third step, these obligations should be supported by an obligation to set variable remuneration for corporate directors. This obligation is however qualified in three ways: it only applies ‘if variable remuneration is linked to the contribution of a director to the company’s business strategy and long-term interests and sustainability’.
A first assessment
The basic idea to require climate transition plans is certainly sound. Information will help institutional investors such as pension funds to better assess the long-term consequences of their investment. It will likely also lead to greater market transparency overall and increased market pressure to live up to the climate plan. Moreover, the process of drawing up a net-zero place will require companies and directors to self-reflect and to potentially redirect their efforts toward the achievement of the 1.5 goal, in particular in the light of investors’ reactions.
However, there is a great question here to what extent the requirement under Article 15 will achieve significant relevance.
First, there is a certain overlap with the planned Corporate Sustainability Reporting Directive (CSRD). According to Article 19a of that directive, a company’s management report needs to include information necessary to understand its impact on sustainability. Explicitly mentioned as part of that exercise is a plan ‘to ensure that its business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement’. This is almost word to word the same requirement as in the CSDD. While it is certainly true that a separate ‘plan’ (under the CSDD) is likely to be more comprehensive and specific than a mere sub-part of the management report (under the CSRD), but one cannot help but wonder about the additional benefit of the newly proposed plan. At worst, reporting is likely to be a lot of box-ticking and copy and paste in the future.
Secondly, and probably more decisively, many investors are already asking their investee companies to produce similar plans today; due to market pressure, net-zero plans have therefore become common market practice already. The insight that investor engagement is a very powerful and dynamic force for promoting ESG policies is nothing new. It increasingly coincides with additional pressure from the media, from pressure groups, from public opinion, and even from court litigation.
In response to this point, one might argue that regulation has one key advantage over voluntary disclosures in that it may achieve a greater deal of standardisation and harmonisation, which may ultimately ensure greater comparability of the information for investors. That would indeed be a powerful justification for EU activity in the field. However, the proposed net-zero plans under the CSDD Directive will not achieve this. The directive does not provide for any detail as to the structure or content of the envisaged plans, nor is there any empowerment for delegated legislation that may specify such elements. With such vagueness, the Article 15 plans will fail to live up to market expectations of providing reliable and comparable information.
In my view, this is a somewhat missed opportunity for the EU, which should have played by its strengths and harness its power as a standard setter with global influence. What is needed are global criteria that make ESG information both credible and comparable. The proposed net-zero plans in their current shape will not achieve either of this.
Wolf-Georg Ringe is Director of the Institute of Law & Economics at the University of Hamburg and Visiting Professor at the University of Oxford.
This post is published as part of the OBLB series on ‘The Corporate Sustainability Due Diligence Directive Proposal’.