Introduction to Climate Transition Plans
Tim Bleeker (VU, coordinator of the master International Business Law – Climate Change & Corporations)
The conference is kicked off by Tim Bleeker with an introduction to climate transition plans, in which he outlines the state of global warming, addresses the transition needed to achieve climate targets, and discusses the requirements that the CSDDD imposes on climate transition plans. According to him, the climate crisis is, at its core, a responsibility crisis: “we know what to do, we have the resources – both technical and economic, but we get stuck at the question: ‘who does what?’”.
With the CSDDD’s climate transition plan requirement, the contribution of companies to achieving global sustainability goals is no longer voluntary. Companies are not only required to adopt a transition plan, but they also have a “best efforts” obligation to put it into effect. According to the letter of the law, the transition plans must contain time-bound reduction targets to make the business model compatible with global warming to 1.5 °C. Every 12 months companies must report on the progress made towards achieving the reduction targets in their plan and update them where necessary. Attention should be given to absolute emission reduction targets of scope 1, 2 and 3. Lastly, these targets cannot be random but must be based on “convincing scientific evidence” and companies must describe how they will finance these plans.
At first glance, it seems clear what is expected of companies (drawing up a climate transition plan based on convincing scientific evidence). But setting reduction targets is not (only) a technical exercise, as it raises all kinds of normative questions in practice. For example, is a business model “in line with 1.5°C” if it aligns with the 55% emission reduction target by 2030 found in the European Climate Law? Bleeker points out that there is no one-size-fits-all reduction pathway for companies. Some sectors’ emissions are harder to abate than others, for instance because electrification is not always possible. Also, some sectors are vital to society, while it is easier to miss emissions from other sectors. The CSDDD does not provide a tool for allocating these emission reductions.
Even if it were known what emission reduction is expected from different sectors, the question remains what this means for individual companies. Can we stick a general reduction percentage on each individual company, or should distinctions be made between different companies operating in the same sector? Bleeker gives the example of an industry leader that has already taken many sustainability measures and a laggard that has not even replaced the light bulbs. It would be unfair if both had to reduce the same percentage of their emissions, because the latter still has a lot of low-hanging fruit to achieve that reduction, and moreover, with a generic reduction percentage, the differences between them remain. When exactly has an individual company fulfilled its best effort obligation to achieve the reduction? And what room is left for company-specific circumstances, such as the availability of knowledge and financial resources, to shape the best-effort obligation?
The open norms in Article 22 CSDDD create uncertainty and ambiguity, and to keep the ambition of limiting global warming to 1.5°C within reach, it is important to have a social, political and legal discussion on what is actually expected of companies. According to Bleeker, it follows from Article 22 that business as usual cannot be taken for granted. Companies are also asked to describe the change in services or products offered and new technologies. A company must provide an analysis of its emission reduction capabilities. Should the business model prove incompatible with climate targets, the CSDDD requires a business to change its course.
Climate transition plan, annual reporting and auditors
Arjan Brouwer (Professor of External Reporting at VU, Partner PwC)
One of the most notable revisions during the legislative process of adopting the CSDDD was in its scope. The scope of companies covered by the directive has been significantly weakened in the adopted version compared to the first proposal. In the Netherlands, the CSDDD will apply to a limited number of the largest companies. According to Arjan Brouwer, in practice this does not mean that the climate transition plan is relevant for those large companies only. The CSDDD applies to the largest companies in the Netherlands, but to meet its obligations, these companies need information from their value chain. Many companies in their value chain are required to report this information under the Corporate Sustainable Reporting Directive (CSRD). This directive has a larger scope than the CSDDD and applies to several thousand companies. For those companies, it also calls upon them to report a transition plan. Although the requirements for that plan are not as stringent as for companies covered by the CSDDD, it is expected that the obligation to report on it will also be a reason for many companies to take the transition plan seriously.
Developments in sustainability will also eventually materialize in financial consequences. These financial consequences can affect every company, both large and small. This will have an impact on the financial statements, which in turn are mandatory for every company. In this way there is a trickle-down effect, and although the movement of drawing up a climate transition plan is only strictly enforced on large companies, Brouwer expects it to influence other companies as well.
Auditors are expected to provide limited assurance on the sustainability information that is reported under the CSRD. In addition, an auditor also reviews financial statements. Part of the financial statement audit is an assessment of the risk of non-compliance with laws and regulations. The CSDDD will be relevant for the regulatory context in which a company operates and so an auditor will also inquire management on whether the obligations arising from the directive are adequately complied with.
Of concern to auditors is that many companies have yet to start adequately implementing the obligations arising from the directive. Currently, many companies only disclose very limited information on sustainability matters. Various regulators have also been critical of the sustainability impact disclosures in financial statements, according to reports by the European Securities and Markets Authority (ESMA). Sustainability disclosures were deemed insufficient and climate risks were not adequately reflected in the financial statements.
According to Brouwer it is important for companies to properly explain in their annual reports what the various scenarios are, what the associated uncertainties are and what impact this has on the estimates made. The report should also provide insight into important dilemmas. Nobody knows what the future will look like, and choices must be made by executives. A supermarket that tries to reduce food waste by wrapping cucumbers in plastic to extend their shelf life faces higher plastic consumption. Reducing plastic consumption may in turn lead to more food waste. Perhaps the maximum result cannot be achieved on every individual aspect, but choices have to be made to achieve the optimal situation when balancing everything against each other. Vulnerability about these dilemmas in the sustainability report is important. This provides a basis to engage with stakeholders who disagree on where the priority lies. That, according to Brouwer, is what accountability and information are for: a basis for conversation with each other.
Relationship between climate transition plans and sectoral climate legislation
Marjolein Dieperink (Partner at AKD, professor of ‘Climate Change and Energy Transition’ at VU)
According to Marjolein Dieperink it is important to also consider sectoral climate legislation when interpreting Article 22 CSDDD. A general principle in state and administrative law is lex specialis derogat lex generalis: a law governing a specific subject matter overrides a law governing only general matters. Article 22 contains an open norm: an obligation for companies to bring their business model and strategy in line with 1.5 °C warming, but not specifying what emission reduction percentage underpins that target. Apart from the CSDDD, there is a lot of other legislation that includes sector-specific reduction targets. One example is the Renewable Energy Directive III (RED III), which governs a specific subject matter and sets very specific emission reduction standards for various transport sectors and the industry sector. The question arises how these sector-specific laws and regulations relate to Article 22. Does an emission reduction obligation in a lex specialis take precedence over a generic obligation to reduce greenhouse gases?
RED III determines specific emission reduction percentages for various sectors. For example, a chain emission reduction percentage of 14.5% is included for the transport sector, meaning that over the entire value chain that emission reduction percentage must be achieved. It is up to the member states to implement this directive in national legislation. At the end of April, a letter of the Dutch parliament put forward a proposal to divide this 14.5% emission reduction percentage over different sub-categories of transport. A distinction is made between road transport (with a proposed emission reduction obligation of 22.5%), maritime shipping (8.2%), inland navigation (14.5%) and aviation (5.3%). A question one could raise considering the open norm of Article 22 is whether the emission reduction obligation stemming from it should be the same for each sector. The implementation of RED III in national legislation shows that the Dutch legislator chooses to differentiate between the reduction targets of different sectors. Furthermore, it is important to note that not every car, truck or seagoing vessel needs to meet the emission reduction target individually. Through a system of tradable allowances, one can choose to either meet emission reduction targets or buy additional emission allowances. This stems from an idea of efficiency: companies should be able to reduce emissions where it is cheapest to do so.
The legislator thus chooses not to treat everyone who emits equally, a distinction is made between different emitters in terms of the emission reduction obligation. This could infer that if it follows from Article 22 that there is an emission reduction obligation of 55% in 2030 (in line with the European Climate Act) this does not necessarily result in a 55% emission reduction obligation for every company individually.
An important prerequisite in this context is both legal certainty and investment security. According to Dieperink Article 22 CSDDD should be specified further by additional legislation to meet these prerequisites. Companies and emissions that are covered by sectoral legislation that imposes specific emissions standards, do not have an additional reduction obligation under Article 22 CSDDD, according to Dieperink.
The interpretation and scope of “best efforts” in Article 22 CSDDD
Davine Roessingh (Partner at Brauw Blackstone Westbroek)
Davine Roessingh starts by noting that Article 22 CSDDD fits the current zeitgeist: using open norms to try to address rapidly succeeding changes in society. The climate transition plan is an open norm with a best-effort obligation to do ‘anything’. What is striking here is that a best-effort obligation has traditionally been an obligation between two contractors, with a specific goal or end result. In contrast, Article 22 CSDDD entails an open norm that is not directed to one other legal subject but to society as a whole, without a clear end result towards which efforts should be directed.
The level of effort that can be required from individual companies does however depend on the norm. The legal norm arising from Article 22 CSDDD is still unclear. What does it mean to align your business model and strategy with the transition to a sustainable economy, and to limiting global warming to 1.5°C in line with the Paris Agreement? Who decides how and when a companies’ business model is aligned? How does the obligation of the climate transition plan relate to the principle of ‘common but differentiated responsibilities’? And can the obligation intensify as time passes, because a company must focus its efforts on a ‘1.5°C’ outcome, and if that goal becomes increasingly out of reach, do the efforts that can be required of legal subjects become higher?
In any case, it is important that the best-efforts obligation is interpreted as uniformly as possible in Europe to create a level playing field. Otherwise, it could be the case that in one country very little effort is required from companies, while in another country legal entities have a much higher obligation to meet their “best effort”. Looking at CJEU cases in which there was a best-efforts obligation, it can be seen that “best efforts” can mean anything depending on the context of the obligation, and that there are different terms used in different laws that are also inconsistent in their translation, and furthermore that different procedures give different interpretations to the concept of “best efforts”. Roessingh concludes that in any case, a best-efforts obligation is not just about the low-hanging fruit, but it is also not a “hell or high water” or “no matter what” obligation.
A best-efforts obligation is thus contextual in nature. According to Roessingh, the interpretation of the obligation of individual companies can be linked to an objective context or subjective context. Objective factors that can give substance to a best-efforts obligation include national and sectoral transition pathways, but also a company’s emission reduction potential. To this end, a company will have to allocate or at least map its emissions to see in which scope, sector and jurisdictions they fall. Furthermore, a company’s governance, the wider market transition and operational and financial capabilities are important here. According to Roessingh, the objective context also includes the fact that a company needs to undertake climate risk management. Besides mitigating climate change, she says, companies will also want to consider climate adaptation, the ‘risk in’ scenario. Companies can then put together the mitigation and adaptation scenario and decide, if they are conflicting, how to prioritize them. This objective context will vary greatly depending on whether companies are different in nature, move in different sectors and operate in different markets.
The subjective context may lead to the result that two ostensibly the same companies cannot be required to make the same efforts and that their obligation therefor differs. One can think of geographical aspects (what is the location of the different branches and the availability of labor to implement the climate transition plan, do the raw materials used by the company come from all over the world or is their origin more local, who are the customers, in which income segment are they and to what extent are they able to pay higher prices for more sustainable products?), financial aspects (is there room for investment?), operational aspects (to what extent are emission reductions within the company’s own control?) and carbon accounting aspects.
The question arises to what extent a company’s best effort obligation can be influenced by subjective circumstances. If we as a society decide that a company’s subjective context is important in determining its best-efforts obligation, then a more substantive test will be needed to assess whether a company complies with its obligations. To arrive at the best-efforts obligation of Article 22, Roessingh says that it is important to be able to better interpret the legal norm and look at the weighting of the objective or the subjective context. As Roussingh rightly concludes, there is still plenty to explore in Article 22 CSDDD.
Climate plan and a director’s responsibilities
Jaap Winter (Professor ‘Business Law’ at VU, chairman of the supervisory board at Royal Schiphol Group)
The requirement to implement a climate transition plan and then put it into effect is an obligation of the company and thus does not impose an obligation on directors as individuals. However, according to the last speaker, Jaap Winter, it is part of the duty of the management board and supervisory board to ensure that a company complies with the law.
In accordance with Dutch company law, directors are obliged to perform their duties in the interests of the company and its affiliated business. Supervisory directors do the same, from a supervisory position. In the well-known Cancun judgement, the Dutch Supreme Court ruled that the interests of the company are determined by promoting the company’s continued success. This involved not only the creation of profitability for shareholders, but also taking into account the interests of others involved in the organization. The interests of other stakeholders may not be harmed unnecessarily or disproportionately. So far, only employees or creditors have been counted as other stakeholders.
The current developments surrounding climate change require a very different approach to company law, however. With the introduction of the CSRD and the CSDDD, the concerns of the world at large become the concerns of the company. Executive and supervisory directors will have to account for them. Stakeholders of a company are actually those who are potentially impacted by corporate activities, even without being directly involved in the organization. The question is whether Dutch corporate law appropriately expresses a company’s responsibility in society. This responsibility, being a corporate social responsibility, extends beyond just those directly involved in a company’s organization.
Article 22 CSDDD also raises several questions for Winter. If limiting global warming to 1.5 °C is no longer possible, a scenario where we may already be, what does a best-efforts obligation to achieve that goal entail? Can an individual company be obliged to reduce their emissions beyond the target that has been laid down for the sector in which the company operates? What if the implementation of a beautifully drafted climate plan is delayed or the results disappoint? Does Article 22 impose an additional liability risk on directors?
A duty of the company does not automatically lead to personal liability of directors if that duty is not fulfilled. Under Dutch liability law, there must be personal serious culpability on the part of managing or supervisory directors in the performance of their duties resulting in a failure to comply with the statutory duty. According to Winter, the wording of Article 22 contains a buffer for personal liability of directors. There seems to be room for a reasonableness test, partly because it concerns a best-efforts obligation rather than an obligation of result. Also, the requirement of personal serious misconduct acts as a protection for directors who have made serious efforts to bring the company’s business model in line with 1.5 °C, but for some reason have not achieved it. In any event, the Cancun standard will be adhered to in order to avoid unnecessary, disproportionate harm to other stakeholders. To that end, doing nothing is not an option in any case, as that may cause harm that could have been avoided.
Paneldiscussion on challenges and opportunities that come with climate transition plans
Gilles Goedhart (Ministry of Foreign Affairs, International Responsible Business Conduct legislation coordinator)
Donald Pols (Director Milieudefensie)
Evert Jan Hummelen (ACM, Supervisor sustainability and responsible business conduct)
Robert Koolen (Heijmans, Director sustainable development)
Marco Bosman (Vattenfall, Director Regulatory Affairs/Climate)
It follows from the panel discussion that in practice, on the one hand, there is a need for legal certainty by further fleshing out the open norms, but on the other hand, there is a need for flexibility on the part of companies. It is expected that not only drafting a climate transition plan will be challenging, but also its implementation and how to achieve its targets. One of the panel’s final recommendations is perhaps particularly appropriate for a legal conference: “do not wait until all legal obligations are set out in stone but write down what you are going to do and implement it with common sense”.
The Amsterdam Centre for Climate Change and the Law (A4CL) is a hub for legal scholars and practicing lawyers with expertise on corporate climate obligations. This conference is made possible by the Amsterdam Sustainability Institute.
This report was written by Robin Kautz. Kautz is a PhD candidate at A4CL. Her research focuses on the interpretation and implementation of the climate transition plan of Dutch listed companies.