How the EU Corporate Sustainability Due Diligence Directive (CSDDD) can be harnessed to promote a just transition
Following extensive negotiations, the EU Corporate Sustainability Due Diligence Directive – new legislation that sets out companies’ obligations regarding the human rights and environmental impacts of their activities – has now entered into force. Sophie Tuson and Tiffanie Chan identify five key tools in the Directive that could drive the just transition agenda within corporate boardrooms, while also noting its limitations.
Four years in the making, the EU Corporate Sustainability Due Diligence Directive (CSDDD) came into force this month to support the corporate transition to a sustainable economy under the European Green Deal. This landmark legislation requires EU and non-EU companies that meet certain thresholds of size and turnover to conduct mandatory risk-based due diligence to identify, prevent and mitigate adverse human rights and environmental risks and impacts in their operations and ‘chain of activities’. These impacts are defined by reference to specific legal instruments listed in the CSDDD’s Annex, and include forced labour, child labour, pollution, waste management, biodiversity loss and ecosystem degradation. Regulators in each EU member state will enforce the obligations and have the power to impose significant fines for non-compliance.
When it comes to driving a just transition to a low-carbon economy, the CSDDD may not at first glance appear to carry much weight: although it expressly refers to this concept in a handful of places in its recitals (non-operative provisions), this is mainly through reference to other documents published by the European Commission, Council and Parliament. However, we have identified the following five tools in the directive that could drive this agenda forward within corporate boardrooms.
Tool 1: Mandatory human rights due diligence
The negative social impacts of corporate activities on workers, communities and suppliers are explicitly addressed in the Directive’s due diligence obligations, which require companies to prevent or end “adverse human rights impacts” resulting from their operations and chain of activities. In principle, this would cover various social impacts resulting from companies’ transition to low-carbon operations, products and services, for example requiring companies to reduce the negative impacts of new renewable energy projects on local communities; ensuring that critical minerals for new green technologies are responsibly sourced; and preventing discrimination and wage inequality in the distribution of new green jobs.
These provisions could be viewed as an attempt to address the social impacts of the private sector’s transition to net zero. However, some have criticised the limited scope of the human rights impacts covered by the CSDDD, and arguably the Directive makes little attempt to explicitly link corporate climate action with human rights due diligence, with no reference to climate change in the list of environmental and human rights impacts in its Annex.
During negotiations on the text, non-governmental organisations (NGOs) called for a broader conception of ‘climate due diligence’ in the CSDDD’s suite of obligations that would explicitly require companies to mitigate both their greenhouse gas emissions and the social impacts of their low-carbon transition. In the absence of this, and with the failure to explicitly link climate change with human rights due diligence, there is some confusion over how climate change and its associated social impacts should be treated under the directive. This represents a missed opportunity for more joined-up corporate action to support the just transition.
Tool 2: Civil liability and the right to compensation
Where harm has occurred, Article 29 of the CSDDD allows affected individuals to bring civil cases against companies to hold them responsible. Parent companies can be held liable for human rights and environmental abuses carried out by their subsidiaries operating in other countries. The directive tries to account for foreseeable procedural barriers to access to justice, such as financial means, access to lawyers and access to evidence held by the company. (See here for a detailed analysis.)
To some extent, this provision reflects principles of procedural, restorative and transitional justice, which are key to delivering a credible just transition. In doing so, it gives agency to those affected to seek redress for harm caused by allegedly ‘green’ operations. For example, it provides an avenue for communities affected by hydropower projects to seek compensation for damage to livelihoods or impacts to water access and sanitation. However, as with other provisions in the CSDDD, its scope was watered down over the course of negotiations and there remain real challenges and high legal thresholds to bringing a claim and obtaining compensation in practice.
Tool 3: Paris-aligned transition plans
The role of companies in combating climate change is most explicitly addressed in Article 22 of the CSDDD, which introduces an obligation for companies to “adopt and put into effect” a climate transition plan that is aligned with the Paris Agreement goal to limit average global temperature rise to 1.5°C, and to review and update it annually against progress. The obligation to implement a transition plan goes beyond the mere requirement to disclose a plan, which is already required under the Corporate Sustainability Reporting Directive. However, the CSDDD does not explicitly require companies to address or disclose the potential justice implications of their transition activities on workers, communities or suppliers, such as the loss of jobs for workers directly and indirectly involved in their chain of activities.
This lack of clarity may be addressed in practical guidance by the European Commission which is due within the next three years. There are promising opportunities for the Commission to leverage existing guidance on corporate transition plans such as the Disclosure Framework of the UK’s Transition Plan Taskforce (TPT), and existing standards on responsible corporate conduct like the updated OECD’s Guidelines for Multinational Enterprises on Responsible Business Conduct, both of which explicitly embrace just transition principles. These include requiring disclosures on how companies have identified, assessed and taken into account adverse impacts of their transition plans on stakeholders and society (in the TPT’s framework), and recommending social engagement, collective bargaining, responsible supplier disengagement and meaningful stakeholder dialogue to mitigate adverse social impacts of decarbonisation (in the OECD’s guidelines).
Arguably, some of these measures are already accounted for elsewhere in the CSDDD’s due diligence provisions, but tying these together and explicitly linking the implementation of the transition plan with the potential creation of new social risks and impacts requires companies to consider these impacts at the outset and ensure meaningful participation of potentially impacted groups as part of the company’s transition planning.
Tool 4: Meaningful stakeholder engagement
The CSDDD includes fairly prescriptive provisions on when and how companies must conduct stakeholder engagement in relation to identifying potential human rights and environmental impacts, developing prevention and corrective action plans and deciding to terminate a business relationship (in Article 13[3]). It is promising that while companies can meet stakeholder engagement obligations through multi-stakeholder initiatives, the directive deems this insufficient on its own to meet a company’s obligations to consult employees and their representatives. Given the just transition agenda emerged from the trade union movement, it is important that unions and workers – formal and informal – remain central to the transition process.
However, procedural justice requires more than simply consultation. It is unclear from the text whether stakeholders such as workers will have a say in how their views are considered and whether they will have any decision-making power. The EU will publish further guidance on the stakeholder consultation requirements by 2027, which may provide some clarity. It is notable that while consultation is required at four specific stages of the due diligence process, it is only required “as appropriate” when companies are developing indicators to monitor the effectiveness of their due diligence process. The discretion given to companies here risks sidelining stakeholders at an important point in the process, potentially undermining the broader just transition agenda.
Tool 5: Protections for small and medium-sized enterprises (SMEs)
The CSDDD includes various protections to mitigate the financial and administrative implications of conducting due diligence for SMEs and smallholders, acknowledging that many are already struggling in the current global economic crisis. These include requirements for companies to use fair, reasonable and non-discriminatory contractual terms, to cover the cost of any third-party audits, and to only terminate the relationship with an SME “as a last resort” – not when it would cause disproportionate harm to the SME compared with the human rights or environmental impacts being addressed. The Directive also encourages (but does not require) companies to provide additional capacity building and financial support, such as training or low-interest loans, to support SMEs to comply with the due diligence obligations. From a distributive justice standpoint, these provisions are important as they seek to share the costs and burden of due diligence more fairly and prevent it simply being shifted up the supply chain to SMEs and smallholders.
While the protections for SMEs are significant, further guidance is now needed from the European Commission on how they will work in practice, including on the level of support that companies are expected to provide to SMEs within their value chains and what any ‘just’ contractual terms should look like. On the latter, there are opportunities for the Commission to leverage the work of The Chancery Lane Project on just climate-related contractual clauses.
Policy measures by member states will also be important to incentivise the right corporate behaviour with respect to SMEs, such as through fiscal measures like tax breaks or incentives for those that can demonstrate meaningful support for SMEs.
Finally, any further guidance from the European Commission on companies’ annual reporting obligations under the directive should also require companies to make specific disclosures on the support they have provided to SMEs. This would help drive transparency and enable stakeholders and civil society to push for more ambitious action where needed, helping to drive the just transition agenda.
The CSDDD must now be harnessed by key actors to implement a just transition
A just transition can be implemented in many different ways, and policies to tackle the adverse social impacts of the low-carbon transition may induce different types of change. Research by the Grantham Research Institute and the Just Transition Finance Lab has found that the majority of government approaches to date are focused on ‘status quo’ or ‘managerial reform’ interventions, meaning policies that avoid a group’s situation being worsened by the transition and seek greater equity and justice within the existing economic system. These are often entity-level programmes, and the CSDDD broadly fits within this category.
While the CSDDD seeks to embed concepts of distributive, procedural and restorative justice through mechanisms like burden-sharing, support for SMEs, stakeholder consultation and civil liability, it makes little attempt to address more fundamental economic power structures or interlinked systems of oppression that underpin worsening social inequalities linked to climate change. In other words, it does not adopt a ‘transformative’ or ‘structural reform’ approach. It is also not yet clear how successful the CSDDD will be in addressing and preventing potential injustices taking place upstream and downstream across multiple value chains, which arise as the world transitions to a low-emissions and climate-resilient economy.
All of this is a tall order for any single directive. But as the CSDDD moves into its implementation phase, it is now up to the European Commission, member state governments, the private sector, civil society and the courts to harness the directive’s potential to embed the just transition firmly into the corporate agenda.
Sophie Tuson is a UK-based environmental and sustainability lawyer. The authors thank Catherine Higham for her review of this commentary.