The evolving landscape of global business regulation on climate change
Last week, the long-delayed Corporate Sustainability Due Diligence Directive (CSDDD) was approved by the Council of the European Union. Ian Higham, Catherine Higham and Joana Setzer discuss the implications for companies and climate action in an evolving context that a year ago also saw climate-related updates to the OECD’s voluntary Guidelines for Multinational Enterprises on Responsible Business Conduct.
When the European Commission announced, back in February 2022, it was adopting a proposal for a Directive on corporate sustainability due diligence, its reception seemed broadly positive. The announcement followed requests in 2020 and 2021 from the Council and European Parliament to develop this legislation, which makes certain climate change responsibilities legally binding for companies. Earlier this spring, however, key Member States nearly withdrew their support, but they reached a deal in March and the Parliament adopted a revised text of the Directive on 24 April. Now, with formal approval given by the Council last Friday, 24 May, Member States will have two years to transpose the Directive into national law.
The CSDDD goes beyond requirements delineated in similar national legislation, such as in France and Germany, by explicitly including provisions on climate change. Although these earlier laws required companies to assess and mitigate their potential impacts on human rights and the environment through due diligence processes and may implicitly cover climate change, they do not expressly refer to climate change in the text.
The scope of the Directive includes companies with more than 1,000 employees and annual turnover exceeding €450 million. They will now be required to adopt transition plans that align with pathways to limit warming to 1.5°C in accordance with the goals of the Paris Agreement.
These requirements are among the first legally binding rules to require what some scholars refer to as corporate ‘climate due diligence’, a concept we unpack further in a new study co-authored with Dr Ekaterina Aristova published on 17 May in International & Comparative Law Quarterly. While the CSDDD enshrines corporate climate due diligence requirements in law, other voluntary governance initiatives and soft law instruments complement and may support implementation of the Directive, including recent changes to the Organisation for Economic Co-Operation and Development (OECD) Guidelines for Multinational Enterprises on Responsible Business Conduct, the focus of our study. Here we draw on our main findings to explore the implications of this evolving landscape of regulation on climate change.
Updated OECD Guidelines embed climate change responsibilities
The Guidelines are a set of standards for companies to follow on human rights, the environment and corporate governance. June 2024 will mark the one-year anniversary of their first update since 2011. The significant changes that OECD Member States agreed to through this update explicitly incorporate climate change for the first time, bringing the OECD’s responsible business conduct regime more clearly under the umbrella of global climate governance.
The Guidelines are non-binding but this does not render them meaningless. They are mentioned in the final text of the CSDDD as developing the concept of human rights due diligence and extending it to environmental governance topics, reflecting that both the EU and OECD Member States, which overlap considerably in their membership, had already agreed in principle that climate change responsibilities apply directly to business. The updates to the Guidelines were specifically developed to complement other transnational regulatory initiatives, such as recommendations from a UN expert group on net zero commitments. Last year’s update thereby contributes to a convergence of global standards, sending a clear signal to business on their climate responsibilities.
OECD Member States and other governments adhering to the OECD Declaration underpinning the Guidelines are required to establish National Contact Points (NCPs). These are quasi-judicial bodies that are able to hear complaints, known as ‘specific instances’, against companies that have allegedly violated the Guidelines. NCPs have no enforcement powers and vary in their structure, independence and effectiveness. They can sometimes offer a useful testbed for counter-corporate litigation, and they provide a quicker, cheaper alternative to conventional lawsuits, serving as a forum for the more immediate development and elaboration of norms on responsible business conduct.
Our study analyses 14 climate change-related NCP complaints filed prior to adoption of the revised Guidelines in 2023 (the sample is based on a search of the OECD Watch complaints database conducted in April 2023). The analysis shows that these cases were largely unsuccessful, with only two resulting in an agreement. NCPs had rejected six cases, while two ended in no resolution, and four were pending or under review at the time of writing.
Lacking explicit climate provisions in previous iterations of the Guidelines, litigants often relied on a general environmental chapter, although they sometimes used more creative arguments, such as linking human rights and environmental provisions. Our study shows how these complaints addressed the responsibility to reduce greenhouse gas emissions, combat greenwashing and facilitate a ‘just transition’ to a low-carbon economy. Complaints have targeted both the indirect emissions of financial institutions and the direct emissions of major producers of carbon. Notably, however, we found a dearth of climate adaptation-related cases.
The Guidelines now make climate due diligence an explicit responsibility of business. They also include provisions on climate-related risk disclosure and the importance of access to information, directly addressing concerns around greenwashing reflected in past complaints. The updated Guidelines delineate both mitigation and adaptation responsibilities for business, including ‘circular economy’ approaches and alignment with international instruments such as the Paris Agreement and 2030 Agenda.
More than a soft law instrument
The latest version of the Guidelines may influence future NCP complaints, other types of climate litigation and corporate behaviour generally. It is likely that future NCP complaints will draw more extensively on the international instruments mentioned above. Indeed, two NCP complaints (Friends of the Earth US v. Export-Import Bank of the United States and VU Climate Change and Sustainability Law Clinic et al. v. One-Dyas) have already been filed since the 2023 update that both explicitly invoke the Paris Agreement, one of which also mentions the Sustainable Development Goals in the 2030 Agenda.
Previous iterations of the Guidelines had already influenced jurisprudence in national courts. In April a Dutch court heard arguments in Shell’s appeal against a landmark 2021 decision, Milieudefensie [Friends of the Earth Netherlands] v. Shell, in which The Hague’s District Court ordered the oil and gas company to drastically reduce its emissions. That ruling was based on an unwritten ‘duty of care’ in Dutch tort law, which the court held was informed by the OECD Guidelines and the closely related UN Guiding Principles on Business and Human Rights. Thus the Guidelines should not be dismissed as a mere soft law instrument, and they could be understood as part of a gradual shift towards more ambitious (if not more binding) standards for tackling corporate climate harm.
Challenges – and opportunities
Unfortunately, the Guidelines do little to clarify the interconnections between human rights and climate change, and they do not ground climate responsibilities in international human rights norms. This constitutes a missed opportunity that could impair the Guidelines’ effectiveness. The final CSDDD text arguably exhibits the same siloed approach, carving out climate change as an issue separate from broader due diligence. While this approach brings additional clarity on transition plans and alignment with the Paris Agreement, it may make it harder for affected communities to hold businesses accountable for failures to act.
But despite these setbacks, jurisprudence such as the Milieudefensie case suggests there is scope for a more holistic interpretation of complementary norms and responsibilities, and the undeniable interconnections of climate change and human rights may eventually consolidate this further.
‘Corporate climate change responsibilities under the OECD Guidelines for Multinational Enterprises’ by Ekaterina Aristova, Catherine Higham, Ian Higham and Joana Setzer, was published in vol. 73 issue 2 of International & Comparative Law Quarterly.