Environmental Due Diligence in the Proposed Corporate Sustainability Due Diligence Directive of the European Union

An Assessment From an Environmental Law Perspective

 

About the author: Laura is a lawyer from Colombia with a masters on international litigation from the Université de Poitiers in France. She is currently pursuing her PHD studies in advanced studies in Human Rights at the Universidad Carlos 3 de Madrid. Her research focuses on Business, Human Rights and Displacement. She has experience working as a research assistant in subjects related to human rights law, international law and business and human rights. She has worked in civil society organizations and at the Pontificia Universidad Javeriana in Colombia as a research assistant as well as teaching research in law to BA students. 

 

 

On 28 July 2022, the United Nations (UN) General Assembly declared that access to a clean and healthy environment is a universal human right (UN news). The relevant Resolution 76/300 calls upon states, international organisations, and business enterprises to scale up efforts to ensure a healthy environment for all. The leading international framework on business and human rights, i.e., the UN Guiding Principles on Business and Human Rights (UNGPs), by contrast, does not make explicit reference to environmental rights or international environmental law. This does not imply, however, that these rights are not important for companies to consider when identifying and addresses adverse human rights impacts. The 2011 OECD Guidelines for Multinational Enterprises (OECD Guidelines), for instance, do take environmental impacts into account in Chapter VI, which is dedicated to the environment. The framework recognises the environmental implications that business enterprises’ activities can have and recommends risk-based due diligence and environmental reporting in accordance with the Rio Declaration on Environment and Development. The 2017 French Loi de Vigilance, which is the pioneering national law on responsible business conduct in the EU, also addresses the environmental implications of business operations. Against this background, it is only coherent that the proposal by the European Commission for a Directive on Corporate Sustainability Due Diligence (CSDDD or Commission Proposal) lays down obligations for companies regarding actual and potential adverse human rights and environmental impacts (Article 1), specifically by requiring the EU Member States to ensure that companies conduct human rights and environmental due diligence (HREDD) (Article 4). HREDD is an ongoing risk management process, which evolved in the UNGPs and the OECD Guidelines and which enterprises need to undertake to meet their responsibility to respect human rights (OHCHR). In this blog post, I will focus on what is understood by an adverse environmental impact and by environmental due diligence in the Commission Proposal.  

 

What is an Adverse Environmental Impact? 

In order to understand the term environmental impact, we must take a look at Article 3 of the CSDDD, which states that an environmental impact is ‘an adverse impact on the environment resulting from the violation of one of the prohibitions and obligations pursuant to the international environmental conventions listed in the Annex, Part II’. In the list of the Annex, we find 12 sections with references to biological diversity, endangered species, mercury products, waste management and disposal, the ozone layer, among others. However, this list is not exhaustive as we find diverse references to instruments that address environmental impacts and policies in the explanatory memorandum and the recitals to the Commission Proposal. In addition, there are human rights, which are arguably also relevant for determining environmental impacts and which can be found in the human rights instruments listed in the Commission Proposal (paragraph 18 of the Annex), namely the Universal Declaration of Human Rights (Article 3), the International Covenant on Civil and Political Rights (Article 5), the UN Declaration on the Rights of Indigenous People (Article 32), and the International Covenant on Economic, Social and Cultural Rights (Article 12). 

If adopted, the CSDDD would complement existing and proposed EU environmental law and policy, including the planned EU Regulation on deforestation free products, the Taxonomy Regulation that seeks to tackle greenwashing in the area of sustainable finance, the European Green Deal, the Sustainable Products Initiative, the Environmental Liability Directive, and the Corporate Sustainability Reporting Directive. Article 3 of the Taxonomy Regulation, for example, defines for several sectors under what conditions an economic activity qualifies as ‘environmentally sustainable’ – requiring, in particular, that an activity does not significantly harm environmental objectives, such as climate change mitigation, the sustainable use and protection of water and marine resources, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems (Article 9). The proposed CSDDD would hence supplement existing EU environmental law and policy by introducing HREDD requirements that draw closely on international environmental and human rights law. 

In the event that the proposed HREDD requirements intersect with other EU rules, the Commission Proposal provides for a conflict-of-law rule (Article 1(3)). The latter holds that, if the provisions of the directive conflict with a provision of another EU legislative act pursuing the same objectives and providing for more extensive or more specific obligations, the provisions of the other legislative act should prevail and apply to those specific obligations. Thus, if any of the EU legal instruments mentioned above contains more detailed requirements with regard to environmental impacts, it would take precedence. The proposed directive also introduces the possibility for the Commission, in collaboration with the Member States and relevant stakeholders, to issue guidelines for specific sectors or specific adverse impacts (Article 13). This would allow to further clarify the notion of adverse environmental impacts, also in view of the proposed civil liability regime (Article 22), which, as Mackie points out, should not merely built upon the provision of examples of impacts allowing companies to easily dispute their liability. Instead, a more robust definition of adverse environmental impacts is needed. 

 

Environmental Due Diligence in the Companies’ Operations and Value Chains 

A key instrument to deal with environmental impacts is environmental due diligence, which requires companies to identify and address adverse environmental impacts not only in their own operations, but also along their value chains. The Commission Proposal draws upon this concept and extends companies’ environmental management obligations to their value chains. In fact, according to the Explanatory Memorandum, risks resulting from adverse human rights and environment impacts present in companies’ value chains often have cross-border effects (like pollution) and coordinated action is necessary to fulfil the environmental obligations of states and business actors. Certainly, under the Commission Proposal, the HREDD requirements focus on so-called established business relationships only. Nevertheless, the due diligence obligations combined with the duty of care on the part of directors (Article 25), who shall take into account the consequences of their decisions for sustainability matters, including, where applicable, climate change and environmental consequences in the short, medium and long term, are likely to facilitate the management, remediation and disclosure of adverse environmental impacts in due time. 

According to the OECD Due Diligence Guidance for Responsible Business Conduct, conducting due diligence necessitates, in particular, Environmental Impact Assessments (EIA). Relevant legislation can already be found at the EU level in the form of the EIA Directive. This directive applies to the assessment of environmental effects of public and private projects, which are likely to have an effect on the environment (Article 1), and requires Member States to adopt all measures necessary to ensure that projects likely to have an effect on the environment by virtue of their size, nature or location are made subject to a requirement for development consent and assessment with regard to their effects (Article 2). The identification of impacts should be based on quantitative and qualitative information and, in case of environmental impacts, the company should obtain information about baseline conditions at higher risk sites or facilities in value chains. 

Other EU environmental instruments, which address environmental impacts, are the Environmental Liability Directive (ELD) and the Corporate Sustainability Reporting Directive. The ELD establishes a framework for environmental liability requiring the prevention and remediation of environmental damage based on the ‘polluter-pays’ principle that covers companies’ own operations, but not their value chains. The polluter-pays principle is an established principle of international environmental law. According to Mackie, it should be implemented when defining adverse environmental impacts so that true social and environmental costs are covered when businesses conduct due diligence. The ELD aims to prevent and remedy specific types of environmental harm, including damage to protected species and natural habitats, water, and land. The polluter only needs to pay for damage to land where this poses a significant risk to human health. In 2021, the Commission published a guideline to clarify the meaning of ‘environmental damage’. The Corporate Sustainability Reporting Directive, in turn, modernises and strengthens the rules about social and environmental information that companies have to report to asses investment risks arising from climate change and other sustainability issues. 

It is important to note that under environmental law and human rights law, due diligence requires ensuring information and participation rights for affected people (Macchi, 2021). In the Commission Proposal, consultations with stakeholders are encouraged ‘where relevant’ without making it a mandatory requirement under all circumstances (Bright and Smit, 2022). The ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy emphasises the importance of a meaningful consultation with people potentially affected when assessing and identifying potential or actual human rights risks of enterprises’ activities. The EU and its Members States are also part of the Aarhus Convention on access to information, public participation in decision making, and access to justice in environmental matters. The OECD Guidelines ascertain that enterprises should ‘engage in adequate and timely communication and consultation with the communities directly affected by the environmental, health and safety policies of the enterprise and by their implementation’ (Chapter VI, 2 (b)). The Commission Proposal does not refer to human rights and environmental defenders as such but refers in general terms to affected groups and other relevant stakeholders (Article 6(4)).  

 

Climate Change: Is it Not an Environmental Impact? 

A curious characteristic of the Commission Proposal is that it does not treat climate change as an adverse environmental impact (see Monika Feigerlová and Betül Karagedik). All along the text we find references to ’adverse human rights and environmental impacts‘, but it is only in Article 15 that we find mention of climate change and limiting global warming to 1,5°C in line with the Paris Agreement. Notably, Article 29(d) holds that in the assessment report, which the Commission would have to submit to the European Parliament and the Council on the implementation of the directive 7 years after it has entered into force, it must be assessed whether the HREDD requirements in Articles 4 to 14 should be extended to adverse climate impacts. Yet, as Macchi rightly points out, separating climate due diligence and human rights and environmental due diligence could lead to ineffective or inconsistent action. A future HREDD regime should rather include obligations related to climate change as climate impacts are an important part of adverse environmental impacts, which, in turn, regularly affect human rights as well. The OECD Guidelines also encourage corporations to consider climate change when assessing their environmental impacts and recommend, in particular, the disclosure of information on Green House Gas emissions (GHG). In my view, for the proposed HREDD regime to be truly effective, climate due diligence should be included and a future CSDDD should give greater importance to climate change-related impacts. 

 

What Comes Next? 

On November 2022, the EU Parliament’s Committee on Legal Affairs released a draft report proposing some amendments to the Commission Proposal. These amendments provide inter alia more clarity on the term environmental impacts, which would encompass impacts on the air, water, soil, biodiversity, animal welfare, climate mitigation and adaptation, the transition to a circular economy and climate change (Amendment 68 on Article 3). The inclusion of climate change and climate adaptation in the amendment brings hope about the inclusion of climate impacts within the environmental impacts for which an enterprise could be liable in the future directive.  

Furthermore, the OECD is conducting public consultations (from 13 January until 10 February 2023) for the planned revision of the 2011 OECD Guidelines with the aim of ensuring that the framework remains fit for purpose. In a first draft published on 13 January 2023, there is a provision that adds a definition of environmental, health and safety impacts to Chapter VI, which reads as follows:  

enterprises should carry out risk-based due diligence as described in Chapter II, to identify, prevent and mitigate the adverse environmental, health and safety impacts of their operations products and services, while contributing to the wider-goal of sustainable development. Such impacts can include, among others: a) climate change; b) biodiversity loss; c) air, water and soil pollution; d) degradation of land, marine and freshwater ecosystems; e) deforestation; f) overconsumption of material, water, energy and other natural resources; g) harmful generation and mismanagement of waste, including hazardous substances; h) harm to animal welfare. 

This list is not exhaustive, but it exemplifies the types of adverse environmental impacts that are to be covered. The third draft of a Treaty on Business and Human Rights that is under discussion also includes a duty for commercial enterprises to conduct due diligence for environmental and climate change impacts (Article 6). Summing up, outside the EU there is also a tendency to amplify the meaning of environmental impacts and to include climate related issues – a development that a future CSDDD should take into account.  

In conclusion, as the amendments and drafts presented illustrate, there is a clear trend to include climate change among the environmental impacts that a company must address in course of a HREDD process. In fact, some of the European instruments that are mentioned in the Commission Proposal already make reference to climate change. So, instead of treating it as a separate issue, a future CSDDD should include climate change in the scope of environmental impacts companies must address and it should hold companies accountable in case that they fail to implement adequate measures.