Companies are no longer off the hook when it comes to the unlimited use of scarce natural resources and their contribution to the degradation of the planet. The EU’s Corporate Sustainability Due Diligence Directive (CSDDD) requires some of the largest companies to adopt and implement a ‘climate transition plan’. More specifically, Article 22 CSDDD requires companies to put forward their ‘best efforts’ to align their business model ‘with the limiting of global warming to 1.5°C in line with the Paris Agreement’. What does this actually mean for companies? In this blogpost I share three insights from a conference on climate transition plans, held at the Amsterdam Centre for Climate Change and the Law (A4CL).
Limiting global warming ‘to 1.5°C’ is as much of an abstract concept as notions like freedom or happiness
How do you define ‘freedom’ or ‘happiness’? Your definition might be different from your neighbour’s as it depends on varying interpretations, the context or an individual’s perspective. The same goes for companies’ interpretation of when they made their ‘best effort’ to limit global warming ‘to 1.5°C’, as there is no set in stone definition.
European Member States have committed themselves to limiting global warming to 1.5°C by adopting the European Climate Law. To that end, they have set an intermediate target of reducing net greenhouse gas emissions by at least 55 per cent by 2030. It will make sense if companies believe that their business model is in line with limiting global warming ‘to 1.5°C’ if they align their intermediate emission reduction targets with the targets adopted in the European Climate Law. However, we can think of sectors where either a higher emission reduction target would be desirable or where a lower emission reduction target would be more realistic.
For example, some emissions – such as those related to frequent flying or recreational activities – might be seen as a luxury, and as a society we might desire more ambitious reduction targets from companies operating in those sectors. This can give companies in high-emitting sectors that can be vital for society – such as the food industry – some leeway in their emission reduction targets. As Tim Bleeker, a climate law scholar specialising in corporate transition plans, pointed out during the A4CL conference, a social, political, and legal discussion is needed to clarify how the remaining carbon budget should be divided.
A ‘one size fits all’ approach to an individual company’s best-efforts obligation?
Contrary to a ‘one size fits all’ approach, a company’s best-efforts obligation should be tailored to the widely varying shapes and sizes of individual companies. To this end, Davine Roessingh, a partner at the Amsterdam-based law firm De Brauw Blackstone Westbroek, proposes three focus points for determining what exactly is asked of individual companies.
First, the result that the ‘best efforts’ of a company should be aimed at needs to be clarified. ‘Limiting global warming to 1.5°C’ is too broad, as it is not directly within the scope of control of individual companies.
Second, a company's individual obligation can be crystallised through objective factors, such as sectoral transition pathways. These can provide clarity on the expected emission reduction achievable in the sector in which the company operates, allowing the company to align its emission reduction target with that of the rest of the sector.
Third, there must be room to look at the subjective context, meaning company-specific circumstances. The emission reduction obligation of two companies operating in the same objective context, can still differ. There can for example be differences in a company’s operational capabilities (to what extent is emission reduction fully within the company’s own control?) or financial capabilities (does the company’s business model allow room for investments?).
Piecing together the puzzle of emission reduction obligations stemming from different sources
As any law student knows, working through the different sources of law can sometimes feel like a maze, being challenging to navigate at times. One general principle that can help overcome conflicts between different sources of law is lex specialis derogat lex generalis: a law governing a specific subject matter overrides a law governing only general matters. Marjolein Dieperink, law professor at Vrije Universiteit Amsterdam, argued that companies that are covered by sectoral legislation with specific emission reduction standards, do not have an additional reduction obligation under article 22 CSDDD. That the CSDDD must be regarded as lex generalis has been confirmed by the European Commission. This means that for the interpretation of an individual company’s reduction obligation, it is also important to consider other sectoral climate legislation. An example can be found in the Renewable Energy Directive III, which sets a very specific emission reduction obligation of 14.5 per cent for the transport sector. This raises the question whether a transport company that sets an overall emission reduction target of 14.5 per cent, meets its ‘best efforts’ obligation to limit global warming to 1.5°C under the CSDDD. And if so, whether that is a desirable outcome for society.
Moving towards credible corporate climate transition plans
It would be an understatement to say that manoeuvring the energy transition is a challenge. Demanding companies to evaluate how their business models fit within the transition towards a sustainable economy is an important step. However, it is very difficult to hold companies accountable if we lack clarity on how far this obligation reaches and what exactly we want them to adhere to. There is a role to play for civil society to think, argue and debate what exactly we expect from companies and their role in the energy transition. When do we consider that a company has really put forward their best effort to limit global warming to such an extent that the planet stays inhabitable? This is a vital step towards credible corporate climate transition plans and to holding companies accountable.
