On 1 June the European Parliament agreed its negotiating position on the European Commission’s proposal for a Corporate Sustainability Due Diligence Directive (CSDDD). The final text of the European Parliament’s report includes tailored due diligence obligations for institutional investors, and requires that companies adopt climate transition plans that are compatible with limiting global warming to 1.5°C.
The agreement means that “trilogue” negotiations between the European Parliament, the Council of the European Union, and the European Commission can begin. Supporting the development of this legislation has been an important area of work for our Policy team, most recently outlined in a position paper in February 2022. We will continue to engage with key stakeholders in Brussels as trilogues commence this month.
Tailored due diligence requirements for investors
The tailoring of due diligence requirements in this latest draft will be particularly relevant to our members. Focused on investors, Article 8a of the European Parliament’s Report on CSDDD reads:
“Where relevant, institutional investors and asset managers shall be required to engage with the investee company and exercise voting rights… in order to induce the management body of an investee company to bring the actual [negative climate impact] to an end or minimise its extent.”
Net-zero-committed investors will be encouraged to see that the European Parliament is working to enact legislation that recognises that the way to reduce real world emissions is through stewardship and engagement activities, rather than simply through divesting shares in high-emitting industries.
Transition plans become mandatory in the EU
Climate transition plans are another area of high ambition in this latest CSDDD draft. The legislation states that all companies must adopt and develop climate transition plans which are compatible with a 1.5°C world and consistent with disclosures under the Corporate Sustainability Reporting Directive (CSRD). Until now, companies have only had to disclose transition plans if they already have them.
This proposal is a vital piece of the puzzle in closing the voluntary disclosure loophole and will help to uphold the coherency and integrity of the EU’s regulatory framework for sustainable finance.
If passed, this mandatory adoption of transition plans will underpin the disclosures that companies make on their transition efforts, giving investors more high-quality information at the asset level to inform their individual portfolio decarbonisation decisions.
While the majority of proposals relating to climate were passed, some elements were watered down, particularly relating to the role of directors. Proposed rules on holding directors legally responsible for implementing and overseeing the due diligence processes of their companies do not feature in this latest draft. That being said, under CSDDD directors will still have a duty of care to “systemically integrate sustainability matters in their decisions.” A proposal to link a proportion of directors’ bonuses to fulfilling sustainability obligations also had its scope limited: it will now only apply to companies with more than 1000 employees.
Overall, sustainable investors will be encouraged by this latest CSDDD draft and its emphasis on stewardship and engagement as key tools for investors seeking to address adverse climate impacts. However, the negotiations ahead are likely to be heated, with the inclusion of financial services an important battleground.
During the trilogues we will continue to advocate for an outcome on the CSDDD that is ambitious on climate while also being workable in practice for investors.
If you’d like to take part in our policy working groups, including our EU Sustainable Finance group which engages on files like CSDDD with EU policymakers, why not speak to our investor relations manager today to find out more about becoming part of IIGCC’s network.