Time to close the gap that allows EU companies to fuel the climate crisis

Despite years of work on the Green Deal, there are still no obligations for large companies in all sectors to actually reduce their emissions. The impending Corporate Sustainability Due Diligence Directive (CSDDD) offers a unique opportunity to force them to change their business model, writes Uku Lilleväli.

Uku Lilleväli is Sustainable Finance Policy Officer at the WWF’s European Policy Office.

Has Europe done enough to put itself on the pathway to net zero and prepare its people, companies and economy for what is to come? We might think the job is done, if trusting some policymakers’ flawed arguments that weakening EU sustainability-related laws would protect and boost companies’ competitiveness.

Delving into the details, however, reveals a different story. Despite years of work on the Green Deal, a glaring gap exists in EU legislation: there is no law obligating larger companies from all sectors to actually reduce emissions. In simple terms, while corporate emissions are a major driver of climate change, most companies are not legally bound to address the climate crisis.

The EU may discourage polluting activities, but it still greenlights fuelling environmental harm. Larger companies are encouraged to report their emissions and draft corporate-level plans to reduce these in line with the Paris goals. Exceptionally, the worst polluters are provided incentives if they can cut emissions in specific installations.

However, there is no economy-wide requirement to guarantee a genuine change in corporate behaviour and put such transition plans into action.

Yet, as climate-related disasters intensify, many EU economies are already suffering. Take Greece, for instance, where recent wildfires and floods cost the nation billions of euros and a quarter of its agricultural output, not to mention countless jobs and livelihoods in agriculture and tourism.

Globally, 97% of executives agree that climate change will affect their strategy and operations in the next three years, according to Deloitte 2023 CxO Sustainability Report. Moreover, the European Central Bank warns, in the September 2023 press release, that if we don’t accelerate the transition to a more sustainable future soon, the credit risk of banks in the euro area could double by 2030, compared with 2022.

These losses, trends and risks beg the question: is it enough for the EU to require companies to merely disclose emissions and draft climate plans? Failing to enforce the implementation of transition plans allows businesses to overlook sustainability impacts and causes them to miss the relevant financial risks, putting at risk firms’ resilience and competitiveness. The incomplete policy framework also challenges the frequent misconception that deregulation automatically leads to a stronger private sector and a more robust economy.

In the coming weeks, the EU policymakers will decide whether to make it mandatory for the companies in the EU not just to formulate, but also to execute climate transition plans. The impending Corporate Sustainability Due Diligence Directive offers a unique opportunity to compel larger companies across sectors to transition their business model, take concrete steps to reduce emissions and adapt to growing climate-related risks.

However, several EU countries actively resist this requirement, risking turning these plans into mere formalities and jeopardising EU firms’ proactive response to and preparedness for the climate crisis.

No, this requirement would not open the door to lawsuits against all companies, if we fail to limit warming to 1.5 degrees. It is not an obligation of results, but of means, meaning that companies are expected to do their best to establish science-based emission reduction targets and transition plans, align their activities with these targets, and put their plans into action.

Mandating companies to implement their transition plans would not only help them effectively steer through the ongoing transition, but also underscore the credibility of their commitments to shareholders and other stakeholders.

By ensuring access to systemic and transparent sustainability data, the EU has laid a solid foundation to support the bloc’s economy to become more sustainable and resilient. But as transparency and planning are only the means to an end, the European Green Deal still lacks the teeth needed to drive a more structural change.

It now falls upon the negotiators of the forthcoming sustainability due diligence law to ensure that companies are genuinely required to support climate goals, enhance their resilience and competitiveness, and safeguard the people and economy of the EU.