Failing to oblige companies to respect the Paris Agreement and conduct climate due diligence would undermine the bloc’s ambition to become a net zero emissions economy.
A key vote is taking place in the European Parliament's Environment Committee this Thursday, when MEPs will decide whether or not to include climate in their corporate due diligence directive. Climate experts from Client Earth, Global Witness, Frank Bold, and WWF explain why this matters. The article was authored by Amandine Van den Berghe (ClientEarth), Arianne Griffith (Global Witness), Julia Otten (Frank Bold) and Uku Lilleväli (WWF European Policy Office).
It’s been three years since the European Union vowed to become a climate neutral economy by 2050 – a goal that will be impossible to reach without urgently mobilising the corporate world.
Yet in the absence of specific and enforceable legal standards, there is still a systemic lack of action from the private sector. While there’s been a tidal wave of corporate climate pledges, the work that is needed to achieve these commitments simply isn’t being done.
In a study of the 1,000 largest companies operating in the EU, only 23 per cent of them had strategies to address climate risks, and as few as 13.9 per cent disclosed relevant data on their emission reduction targets.
This means that these companies are not aligned to shareholder expectations, and are missing opportunities to properly manage and mitigate the risk a warming world presents to their business.
Could the EU force companies to report their climate impacts?
This week, there’s an opportunity to change this sorry situation. The European Parliament is currently debating the Corporate Sustainability Due Diligence Directive.
This proposal could be the lever the EU needs to compel companies operating on its market to drastically pick up the pace.
Requiring companies to address environmental and climate adverse impacts in their value chains is an essential piece of the sustainable economy puzzle. It also makes good business sense.
But there is a glaring flaw in the current legislative proposal: its narrow definition of what constitutes an ‘adverse environmental impact’ will allow companies to turn a blind eye to significant issues in their value chains – including their emissions.
As the European Parliament political groups battle it out to finalise their opinions on the law, the time to set this straight is now.
What will the Corporate Sustainability Due Diligence Directive include?
Under the Commission’s draft text, companies would only have to spot and stop impacts that result from the breach of one of the 12 international environmental agreements referenced in the law – a list that doesn’t even include the Paris Agreement.
Considering that all sectors - automotive, construction, chemicals, food and drink, raw material, metals, and minerals, fashion and beyond - play an irrefutable role in global heating and nature loss, the current definition of ‘environmental impacts’ will fail to fully capture companies’ environmental footprint. That doesn’t exactly foster fair competition.
The Commission’s proposal would only require companies to include adverse climate impacts as part of due diligence seven years after the Directive enters into force – likely to run into the next decade beyond 2030.
This is far too late. Climate science warns that unless we have massive emissions cuts now, the 1.5C goal may soon be out of reach. It is also out of step with the companies that are already developing climate transition plans to manage risk to their businesses.
In order for this law to be fit for purpose, the Environmental Committee of the European Parliament must specify climate as one of the environmental impacts covered by the Directive and urgently fill the large gaps in the EU’s corporate climate regulatory framework.
Clear climate due diligence and effective transition plans
The Commission’s draft law includes requirements for companies to establish a transition plan.
But it should also require companies to carry out an inventory of potential and actual negative climate impacts before they develop these transition plans.
This is a critical step if businesses are to prevent, mitigate, cease, and remedy these impacts successfully. Without knowing these impacts, transition plans risk being nothing more than uninformed guesswork.
Corporate free riders put an unfair burden on climate-friendly companies to reach EU and global climate goals.
Requiring precision in target-setting and the content of the transition plans will ensure companies develop robust plans. This minimises the risk of further greenwashing, which threatens to undermine the transformative action that we need.
In fact, such strict requirements would enable effective implementation of a tool that is already referenced in the EU’s Corporate Sustainability Reporting Directive (CSRD) and Taxonomy Regulation.
A wide range of stakeholders - from business to investors - are calling for greater legal clarity on corporate reporting and risk assessment practices as they move to more sustainable operations. Clear climate due diligence requirements would answer this call.
We need to act now to keep the Paris Agreement alive
A reminder of just how much is at stake: recent analysis of European companies’ public emission reduction targets showed that, far from being consistent with the goals of the Paris Agreement, the sector is actually on track for a 2.4C decarbonisation pathway.
That is almost one degree of warming higher than the limit the world must stay within to keep our planet habitable.
The urgency of the climate crisis means we must ensure companies act now.
To do so makes economic sense. After all, climate change could wipe over 4 per cent off European GDP by 2030 in a worst-case scenario. Disasters such as droughts, which currently cost about €9 billion annually across the EU and UK, have severe impact on business operations, impacting the bottom line through financial losses, reduced revenue and increased costs.
It’s now down to the Environmental Committee of the Parliament to ensure this law actually drives meaningful corporate action on climate and doesn’t just open the floodgates to more greenwashing.