It is a dynamic time for ESG and sustainability legislation globally. While the UK has been dealing with political turmoil and the election of a new government, internationally, the trend for greater legislation around ESG continues as the ever increasingly unpredictable weather patterns reaffirm climate change is evident and that urgent change is needed to seek to moderate and limit this.
In recent months, the European Commission adopted a proposal for a Directive on Corporate Sustainability Due Diligence (CSDDD). This Directive establishes a corporate due diligence duty on the primary aspects of ESG. The core elements of this duty are identifying and addressing potential and actual adverse human rights and environmental impacts in the company’s own operations, their subsidiaries and, where related to their value chain(s), those of their business partners.
On 24 May 2024, the Council of the European Union approved the political agreement, thereby completing the adoption process. The aim of this Directive is to foster sustainable and responsible corporate behaviour in companies’ operations and across their global value chains.
The CSDDD has to be implemented into National law by 2026 and effective from 2027, however, some governments have already moved forward with proposed National legislation; notably both the Netherlands and German governments have prepared legislation. The Directive comes into effect on a phased basis from end 2027 and applies to initially very large corporates and this phases down to those with over 1000 staff and turnover of Euro 450m. It applies to EU businesses and those international businesses operating in the EU. The proposed Dutch legislation goes beyond the EU directive in its scope applying to all companies with over 250 staff and Euro 50m turnover. It is broadly accepted more and more entities will progressively be brought under ESG related legislation to ensure responsible business practices.
The CSDDD due diligence obligations apply to a company’s own operations, the operations of its subsidiaries, and the operations carried out by business partners in the company’s chain of activities. The definition of “chain of activities” has both an upstream and downstream element.
- The downstream chain includes the activities of a company’s downstream business partners related to the distribution, transport and storage of a product if the business partners perform these activities for or on behalf of the company.
- The upstream chain comprises the activities of a company’s suppliers in connection with the company’s production of goods or provision of services, including the design, extraction, sourcing, production, transport, storage and supply of raw materials, products or parts of products and the development of the product or service.
Therefore, an SME supporting a larger enterprise may well be caught in the value chain and need to prove compliance with the legislation and the requirements of their counterparties.
In the UK, the new government has indicated seeking to rebuild closer ties with the EU and while any similar legislation is some way off, the CSDDD, aligns with existing international standards. These include the UN’s Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises, and the OECD Due Diligence Guidance for Responsible Business Conduct; and is generally regarded as the blueprint.
However, as existing UK ESG obligations are captured under several acts, it is unlikely any new legislation will arrive soon as the new Government wrestles with other priorities, although momentum to ensure adoption of ESG is gathering as larger corporate and regulated financial entities ensure they are complying with their obligations for disclosure under reporting rules; which will filter down their supply chains and will impact businesses of all sizes. .
In the US, while some state legislatures are seeking to stop the advance of ESG legislation, at a Federal level the Inflation Reduction Act, is potentially the most significant climate legislation in U.S. history – notwithstanding the curious naming, the act is expected to transform the decarbonization of the U.S. economy and the transition to clean energy;
It is broadly recognised, the world needs to be more sustainable to better protect the environment in which we live and work; therefore, most legal commentators expect there to be a transition of “ESG” from the realm of voluntary frameworks and “soft law” to one of “hard law.” This is real and ultimatley, likely to be among the most enduring trends of recent years.
At this stage, with the trends of the coming years clear to see, I am reminded of the old idiom, “the early bird catches the worm.” As such, I believe those organisations who embrace ESG, its principles and values early, will in time be the beneficiaries, and voluntary proactive action to develop and understand your ESG strategy will ultimately add value and enhance an organisations standing.