The proposed directive on corporate sustainability due diligence (hereby CSDD) aims to enhance corporate governance practices by integrating risk and impact management processes related to human rights and the environment, including those in value chains.[1] CSDD seeks to improve access to remedies for individuals affected by negative impacts of business conduct on human rights and the environment. Larger companies are subject to CSDD, small and medium-sized enterprises excluded.[2]
Article 15 of the CSDD, entitled “Combating climate change”, requires companies to adopt a plan that ensures their business model and corporate strategy align with the transition to a sustainable economy, limiting global warming to 1.5 ºC in accordance with the Paris Agreement. The plan should also indicate the extent to which climate change represents a risk to the company’s activities or a possible impact thereof. Member States should ensure that companies include greenhouse gas emission reduction targets in the plan if climate change is a primary risk or impact.
Nevertheless, the Council removed recital 51, which suggested that emission reduction plans be integrated into the financial incentives of directors, due to concerns from Member States. The Council also amended the definition of “negative environmental impact” in the directive’s Annex I to include specific obligations and prohibitions from international environmental instruments that can be respected by companies, rather than a general reference to climate related treaties and conventions.
CSDD, pursuant to art. 15, would impose on European companies the obligation to implement the Green Deal program approved by the European Union – which establishes, as binding objectives for EU, the achievement of climate neutrality by 2050 and the abatement at least of 55% of CO2 emissions, compared to 1990 emissions, by 2030 (so-called Fit for 55%) – planning the activity of the single company, of the others belonging to the group and of the entire value chain, in such a way that it does not exceed 1.5°C by the end of the century and therefore, ultimately, requiring companies and their boards of directors to plan and manage companies, along the entire chain, so that they are ready for the so-called 55%. CSDD would so codify the obligation for companies to formulate strategic planning so that it refers to the various climate change scenarios (that is, which depend on how much and by how much it is likely that the global temperature will increase in the medium to long term) elaborated by major international research bodies (e.g. IEA) but also national ones (e.g. FEEM ) as the decarbonization strategy varies from country to country. This would therefore lead to the obligation to consider climate change in the strategic elaboration of all the recipient companies of the Proposal, of any industrial sector (not just the energy sector) and to possibly modify their business model if it were not resilient with respect to one or more than the various climate change scenarios.[3]
It has been stated that the private enforcement envisaged by the proposed directive risks exposing the company and the directors to a multiplicity of actions by the shareholders but, above all, by the stakeholders themselves (by leveraging the provisions of CSDD with regard to the power to complaint) as well as all natural and legal persons with reporting powers who have suffered damage.[4]
However, precisely to avoid direct actions against directors, the Council modified the Commission proposal which regulated the duty of care of directors (Article 25) and established the obligation for directors of EU companies to set up and supervise due diligence actions and to adjust the corporate strategy to take into account the negative impacts identified and the due diligence measures adopted (Article 26). These provisions have been deleted from the text. In the light of these changes, the risks feared by the doctrine regarding the excessive load of duties placed on companies and directors, as well as the indeterminacy of the same and the possible consequent surplus of litigation, would seem largely dispelled.
Furthermore, the considerations, technically shareable of the doctrine linked (perhaps too much) to shareholder value maximization theory[5], would however seem to clash with the urgency of the fight against climate change and the need to develop solutions that can also significantly involve corporation in the emission mitigation commitment.
On the other side, there are those who have pointed out that the adoption of a strategy to contain CO2 emissions brings with it an absolute convergence between the interest of the shareholders and the interest of the environment itself: the failure to consider the physical and transition risks or the opportunities linked to climate change can produce damage to the company’s assets, and therefore to all shareholders (current and future), as well as to the environment itself. Adopting management choices that consider climate change means pursuing both the interest of the company and its shareholders and of the environment.[6]
It will therefore remain to be seen whether with the enactment of CSDD a truly virtuous spiral will be launched which will make it possible to achieve the ambitious climate neutrality objectives set by international treaties and by the EU framework.
______________________________________
References
[1] Proposal for a Directive Of The European Parliament And Of The Council On Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52022PC0071. For a general overview of CSDD see among the others: a.m. Paccess, Civil Liability in the EU corporate sustainability due diligence directive proposal: a law and economics analysis, ECGI Law working paper n. 691/2023.
[2] It applies to companies which had on average more than 500 employees and a worldwide net turnover of more than EUR 150 million in the last financial year for which the financial statements were drawn up, and (ii) those which had more than 250 employees on average and a worldwide net turnover of over 40 million euros, provided that at least 50% of this net turnover has been generated in particularly sensitive sectors for the objectives of the Proposal (e.g., manufacturing of fabrics, leathers and related products; agriculture, forestry, fishing; extraction of mineral resources). The subjective scope of application also includes companies incorporated in non-EU countries which in the financial year preceding the last financial year had a net turnover generated in the EU (i) of over 150 million euro or in any case (ii) having generated a turnover net of more than EUR 40 million but not exceeding EUR 150 million in the Union in the financial year preceding the last financial year, provided that at least EUR 20 million has been generated in one or more of the sectors in sectors which are particularly sensitive to the objectives of the Proposal.
[3] S. Bruno, Il ruolo della s.p.a. per un’economia giusta e sostenibile: la Proposta di Direttiva UE su “Corporate Sustainability Due Diligence”.Nasce la stakeholder company?, in Rivista di Diritti Comparati, vol. 3/2022, pp. 303 – 338.
[4] G. D. Mosco, R. Felicetti, Prime riflessioni sulla proposta di direttiva UE in materia di Corporate Sustainability Due Diligence, Analisi Giuridica dell’Economia, Vol. 1/2022, pp. 185 – 211.
[5] Among the greatly vast literature on shareholder primacy, an effective definition of shareholder value maximization was given by the nobel prize economist M. Friedman, The Social Responsibility of Business is to Increase its Profits, New York Times, September 13th 1970, available at ://www.nyatimes.com/1970/09/13/archives/a-friedman-doctrine-thesocial- responsibility-of-business-is-to.html, «[t]here is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game,which is to say, engages in open and free competition without deception fraud».
[6] S. Bruno, op.cit.