The evolving landscape of global climate change business regulation

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 businesses and climate action in an evolving context that also saw a year of climate-related updates to the voluntary OECD Guidelines for Multinational Enterprises on Responsible Business Conduct.

When did the European Commission announce?, was still adopting a proposal for a directive on corporate sustainability due diligence in February 2022, its reception seemed to be generally positive. This announcement followed proposals made in 2020 and 2021 by the Council and the European Parliament to develop this legislation, which will make certain climate change-related obligations legally binding on companies. However, at the beginning of spring key member states almost withdrew their support, but in March they reached an agreement and Parliament adopted a revised text directive on April 24. Now, following the formal agreement given by the Council last Friday, May 24, Member States will have two years to transpose the directive into national law.

CSDDD goes beyond the requirements set out in similar national regulations, e.g. in France and Germany, by explicitly including climate change provisions. While these earlier regulations 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 explicitly address climate change in the text.

The scope of the Directive covers enterprises employing more than 1,000 employees and achieving an annual turnover exceeding EUR 450 million. They will now have to adopt transition plans that address how to limit warming to 1.5°C in line with the goals of the Paris Agreement.

These requirements are among the first legally binding regulations to require what some scholars call “climate due diligence” in a company – a concept we explore in detail in a new study co-authored by Dr. Ekaterina Aristova published on May 17 this year International and Comparative Law Quarterly. While the CSDDD enshrines corporate climate due diligence requirements into law, other voluntary governance initiatives and soft law instruments complement and can support the implementation of the Directive, including recent changes to the Organization for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises on Responsible business conduct, which is the subject of our study. Here, we build on our main findings to explore the implications of this changing climate change regulatory landscape.

The updated OECD guidelines include climate change responsibilities

The Guidelines are a set of standards that companies must comply with in the areas of human rights, the environment and corporate governance. June 2024 will be the one-year anniversary of their first update since 2011. Important changes that OECD member countries have agreed to as part of this update will take climate change explicitly into account for the first time, bringing the OECD Responsible Business Conduct Scheme more clearly under the umbrella of global climate governance.

The guidelines are not binding, but that does not make them pointless. These are listed in the final text of the CSDDD as developing the concept of human rights due diligence and extending it to environmental management topics, reflecting the fact that both EU and OECD member states, whose membership overlaps significantly, have already agreed in principle, that obligations related to climate change apply directly to companies. The updates to the Guidelines have been developed specifically to complement other transnational regulatory initiatives, such as the recommendations of the UN Expert Group on Net Zero Commitments. Last year’s update thus contributes to the convergence of global standards, sending a clear signal to companies on their climate responsibilities.

OECD member countries and other governments adhering to the OECD Declaration forming the basis of the Guidelines, the creation of National Contact Points (NCPs) is required. These are quasi-judicial bodies that can hear complaints, known as “specific instances”, against companies that have allegedly breached the Guidelines. NCPs have no implementing powers and vary in structure, independence and effectiveness. They can sometimes provide a useful testing platform for litigation against corporations, and they also provide a faster and cheaper alternative to conventional litigation by serving as a forum for more direct development and development of standards for responsible business conduct.

Our study examines 14 climate change-related NCP complaints submitted before the adoption of the revised Guidelines in 2023 (sample 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. The national contact points rejected six cases, two were inconclusive and four were ongoing or under review at the time of writing.

Due to the lack of explicit climate provisions in previous editions of the Guidelines, disputing parties often relied on the general environmental chapter, although sometimes they used more creative arguments, such as the link between human rights and environmental provisions. Our research shows how these complaints focused on responsibility for reducing greenhouse gas emissions, combating “eco-darkwashing” and facilitating a “just transition” to a low-carbon economy. The complaints concerned both the indirect emissions of financial institutions and the direct emissions of major carbon dioxide producers. However, it is worth noting that we found a paucity of cases related to climate change adaptation.

The guidelines now make climate due diligence an explicit responsibility for companies. They also include provisions on the disclosure of climate-related risks and the importance of access to information, directly addressing the ‘eco-text’ concerns expressed in previous complaints. The updated guidance sets out responsibilities for businesses to mitigate and adapt, including a ‘circular economy’ approach. and alignment with international instruments such as the Paris Agreement and the 2030 Agenda.

More than a soft law instrument

The latest version of the Guidelines may have an impact on future NCP complaints, other types of climate disputes, and corporate behavior in general. It is likely that future NCP complaints will rely more heavily on the international instruments mentioned above. Indeed, two KPK complaints (Friends of the Earth US v. Export-Import Bank of the United States AND Climate Change Law and Sustainable Development Clinic VU et al. v. One-Dyas) have already been submitted since the 2023 update, and both explicitly refer to the Paris Agreement, one of which also mentions the Sustainable Development Goals in the 2030 Agenda.

Previous editions of the Guidelines have already influenced the jurisprudence of national courts. In April, a Dutch court heard arguments in Shell’s appeal against the landmark 2021 decision, Milieudefensie (Friends of the Earth Netherlands) v. Shell, in which the District Court of The Hague ordered the oil and gas company to drastically reduce emissions. This ruling was based on an unwritten “duty of care” contained in Dutch tort law, which the court said flowed from the OECD Guidelines and the closely related UN Guiding Principles on Business and Human Rights. Therefore, the Guidelines should not be dismissed as a mere soft law instrument and can be understood as part of a gradual shift towards more ambitious (if not more binding) standards for combating climate harm in businesses.

Challenges and opportunities

Unfortunately, the Guiding Principles provide little explanation of the links between human rights and climate change and do not base climate responsibility on international human rights standards. This represents a missed opportunity that may undermine the effectiveness of the Guidelines. The final text of the CSDDD is likely to take the same isolated approach, treating climate change as a separate issue from broader due diligence. While this approach provides additional clarity on transition plans and alignment with the Paris Agreement, it may make it more difficult for affected communities to hold companies accountable for omissions.

However, despite these failures, case law such as Milieudefens This case suggests that there is scope for a more holistic interpretation of complementary norms and obligations, and that the undeniable interconnections between climate change and human rights may ultimately consolidate them further.

“Corporate responsibility for climate change in accordance with the OECD Guidelines for Multinational Enterprises” by Ekaterina Aristova, Catherine Higham, Ian Higham and Joana Setzer, published in volume 3. 73 issue 2 International and Comparative Law Quarterly.