From Paper to Practice

In this second part of our two-part blog post, we will discuss how the CSDDD negotiations influenced the design of its environmental provisions and identify missed opportunities. We will conclude by analysing what factors are important to ensure that transposition and implementation remain true to the CSDDD’s objectives, enabling it to achieve its purpose of contributing to more sustainable value chains. For a closer look at the environmental scope of the Directive, please refer to the first part of our blogpost.

Why do we have such an Environmental Scope?

Diverging approaches between the Commission, the Council of the EU, and the European Parliament strongly influenced the debate over how to define the CSDDD’s environmental scope. The three institution’s negotiating positions differed on the role of existing international environmental treaties in defining the environmental scope, the list of international instruments and provisions to take into account, and the nature of obligations regarding climate change mitigation.

Given these debates, as outlined by Nele Meyer and Christopher Patz on this online symposium, defining the substantive scope of environmental due diligence was one of the most contentious points of the CSDDD’s legislative process. Except for biodiversity, the Commission’s initial proposal drew on the approach set forth in the German Supply Chain Act and defined environmental impacts by reference to a list of provisions under international environmental law that define clear obligations for business actors. The Council’s negotiating position expanded the list of environmental provisions, but largely kept to the same logic, including by separating environmental due diligence and climate impacts, to be addressed through climate transition planning.

The European Parliament, on the other hand, sought to maximise alignment to and coherence with existing EU sustainability legislation. It had proposed to define a list of environmental impacts, based on the categories that have also been used in the EU Batteries Regulation, in the CSRD and the Taxonomy Regulation, arguing that companies already have to identify and address these impacts according to the respective EU legislations. This would have also aligned the CSDDD with the 2023 update of the OECD’s Guidelines for Multinational Enterprises, which clarified the expectation on companies to carry out risk-based due diligence for all adverse environmental impacts (including climate) and provided an indicative list of environmental impacts that companies should address.

The CSDDD’s missed Environmental Opportunities

Despite calls to define climate due diligence as part of the overall approach to environmental due diligence, most notably by including the Paris Agreement in the Annex, the EU co-legislators decided to specify climate mitigation-related impacts via a transition plan obligation. Nevertheless, as per Point 15 of Part I, Section 1 of the Annex, companies have to tackle pollution and harmful emissions as drivers of environmental degradation that may lead to human rights impacts.

By restricting adverse environmental impacts to a limited list of internationally recognized prohibitions and obligations, co-legislators missed an opportunity to develop a comprehensive and coherent approach to environmental due diligence. The fragmented nature of international environmental law (e.g., there are no instruments addressing soil degradation or plastic pollution yet), together with the fact that only some provisions of a limited list of international instruments are incorporated, opens space for specific instances of adverse environmental impacts to slip through the cracks, making it challenging for companies to develop a coherent approach to conducting environmental due diligence.

Regarding environmental due diligence, it is important to note that CSDDD includes a limitation regarding the value chain. Companies will only be required to prevent or mitigate the adverse environmental impacts that could result from infringing prohibitions and obligations in the context of their own activities, as well as those of their subsidiaries and business partners in certain areas of their value chains referred to as the “chain of activities”. The concept of “chain of activities” limits due diligence obligations to the upstream value chain and certain limited activities of a company’s downstream, namely the “distribution, transport and storage” of a product when done “for or on behalf of the company”. This will limit the directive’s effectiveness when it comes to environmental impacts arising from the use and waste management of products in the downstream value chain, for instance, in relation to harmful chemicals, and the provision of services. This does not apply to climate transition plans.

Looking Forward: Implementation of the CSDDD’s Environmental Obligations

To conclude, we offer some initial thoughts on how to interpret the outcome of CSDDD in order to ensure that the application and implementation of its environmental and climate obligations are coherent both internally and in relation to other related EU pieces of legislation. In our view, four general aspects should drive effective implementation and enforcement and inspire business efforts to comply with both the letter and spirit of the legislation.

First, environmental due diligence, like human rights due diligence, builds on existing obligations and expectations under international law. Part II of the Annex reflects this relationship by clearly establishing the business obligation to comply with specific provisions derived from international environmental law. Moreover, as established in Recital 32, Article 3(1)(b), and several of the points in Part II of the Annex, said responsibility should be discharged by taking into account national legislation and EU general principles of environmental law (including the precautionary principle, preventive principle, rectification at source principle, and polluter-pays principle).

Second, in our view, environmental due diligence under the CSDDD should be interpreted as a requirement to account for adverse impacts on all aspects of the environment in a more comprehensive manner. Certainly, the CSDDD fails to fully align with OECD standards by adhering to an incomplete patchwork of international provisions. Furthermore, this selective approach to provisions overlooks the inclusion of standards of international environmental instruments that emphasise a preventive approach to environmental damage, even though prevention is a key component of due diligence (for instance, the Annex includes trade-related elements but not the principle of waste minimisation found under the Basel Convention). At the same time, the CSDDD eventually acknowledges – through the reference to environmental degradation in Point 15 of Part I, Section 1, of the Annex and to impacts on ecosystem services in Point 15(e) – that adverse environmental impacts can occur at any point in the business’ interaction with the environment.

The lessons learnt and tools that will be developed as companies prepare for and apply the CSDDD will be instrumental in further developing the specifics of environmental due diligence, with a view to moving towards a more complete framework. In our view, it is particularly important that the guidelines issued by the Commission under Article 19 include examples of both environmental and human rights impacts. Furthermore, the process for companies to identify relevant disclosures under the CSRD will de facto require companies to assess their impacts in relation to climate change, biodiversity, pollution, water, and resource use, providing important insights into how to best approach the task. Similarly, EU Taxonomy requirements and – for some companies – due diligence requirements under the Batteries Regulation – provide relevant complementary elements.

Third, it is regrettable that, due to opposition from Member States, the co-legislators reduced the directive’s corporate governance aspect by deleting provisions on directors’ responsibilities towards the company and due diligence and on financial incentives for the implementation of the climate transition plan. The range and depth of changes brought about by the CSDDD’s requirements will most likely require board involvement and leadership, and the deletion of these requirements will undermine legal clarity, including for the companies themselves. Moreover, as recent litigation continues to highlight, the debate surrounding expectations of directors regarding social and environmental matters remains open.

Fourth, the explicitly acknowledged nexus between human rights and environmental impacts indicates a growing understanding that social and environmental sustainability are inextricably linked and will be covered by the same due diligence obligations (as specified in Articles 7 to 16). While the final text fails to clearly call for a comprehensive approach to environmental due diligence, we believe that both human rights and environmental impacts will be better addressed through an integrated approach to a company’s interaction with its social and natural context.

Acknowledgments

The authors thank Nele Meyer for her useful comments.