The European Union’s plan to slash the scope of new ESG regulations opens the door to a wave of litigation, as companies would no longer be required to act in a way that lives up to the bloc’s climate law.
The warning comes from more than 30 legal scholars across the EU and UK at universities including Oxford and Cambridge. They want EU lawmakers to rethink a planned revision of ESG due diligence requirements, according to a letter addressed to the European Parliament.
The EU’s plan to simplify the Corporate Sustainability Due Diligence Directive (CSDDD), which was proposed as part of an omnibus bill put forward by the European Commission in February, “is really risky,” said Thom Wetzer, founding director of the Oxford Sustainable Law Programme and one of the legal scholars behind the letter.
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The EU’s planned simplification is far-reaching in its scope. Of particular concern to the legal scholars behind the letter is the treatment of so-called transition plans. These are supposed to require companies to document how they will cut emissions in line with the EU’s 2050 net zero goal, which the bloc has enshrined in law.
However, the current wording of the omnibus proposal appears to drop a requirement obliging companies to put transition plans into effect. That would undermine the EU’s chances of living up to its own law, according to the letter.
Without a clearly stated requirement that companies actually implement their transition plans, “it would be very difficult for the EU to achieve its emission reduction targets,” Wetzer said. “This would be a retrograde step.”
A spokesperson for the European Commission said its proposed wording better aligns the requirements of CSDDD with other ESG legislation. It also makes clear that plans, which would be subject to supervision, must include actions for implementation.
Pressure to scale back regulations has come from member states including Germany and France, amid concerns European companies will be too burdened by regulatory requirements to compete with US and Asian rivals. Negotiations are set to continue for months, with a final proposal unlikely until the end of the year.
European Commission President Ursula von der Leyen has made clear she wants to cut red tape, with the likely outcome a slimmed down framework for environmental, social and governance requirements in the bloc.
At the same time, Europe faces pressure from the US to limit the so-called extra-territoriality of its rulebook. In April, the US Chamber of Commerce sent a letter to the Trump administration in which it criticized EU regulations around transition plans as an example of regulatory overreach.
Climate and human rights activists, meanwhile, have slammed the EU’s planned simplification of ESG rules.
Wetzer says he’s aware of “many parties that are active in the litigation space,” and they are “looking very carefully at this part of the omnibus bill and are ready to launch new cases to clarify legal obligations at member state levels.”
The upshot is that “litigation risk on emission reduction is significant in the EU,” Wetzer said. “And that sets the European Union apart from many other parts of the world.”
CSDDD, which was passed into law in the EU law last year, sought to require companies to produce net zero transition plans, and then to live up to them. It also introduced the prospect of financial penalties for companies that fail to address human rights and environmental breaches in their supply chains. Lawmakers last month delayed implementation of CSDDD by a year to allow for revisions.
“It’s not just about achieving the targets,” Wetzer said. “It’s also about achieving it in an orderly manner where companies have legal certainty and can plan ahead. That’s pretty important.”
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