Executives will face bonus cuts if the companies they run fail to hit climate transition targets, under a new European Union proposal that greatly expands the range of levers regulators can draw on to meet terms of the Paris Agreement.
C-suite managers at companies with more than 1,000 employees will be held personally responsible if trajectories for emissions cuts don't align with the objective of limiting global warming to 1.5C, according to the current text of the Corporate Sustainability Due Diligence Directive.
If adopted, the wide-ranging bill also will force companies to identify and address human rights and environmental abuses in their value chains. CSDDD, which has already met with vocal opposition from the finance industry, was approved Tuesday by the EU Parliament's legal committee and will now go to the full assembly. From there, it heads to the European Council, where its passage will likely encounter hurdles.
Industry opposition to key parts of the bill is so intense that lawyers monitoring its progress say the EU faces a bumpy process.
"It is likely that there will be further, significant changes to the CSDDD proposal between now and its final adoption," said Guillaume Croisant, managing associate of the ESG team at Linklaters. "Heated debates are likely on a number of topics" including executive pay.
CSDDD has the potential to be one of the EU's most far-reaching pieces of environmental, social and governance regulations. While ESG rules enforced to date impose disclosure requirements on companies, the due diligence directive would force them to act on the information they're disclosing.
A key focus of the bill is to make sure that private companies have "credible plans" for the transition to a low-carbon economy, said Jurei Yada, program leader for EU Sustainable Finance at climate think tank E3G.
Most companies currently don't link their ESG policies to remuneration. An analysis of 30 of the world's biggest clothing and shoe companies by the non-profit Planet Tracker found that more than half failed to create a connection, and those that did are mostly private firms where ownership is concentrated rather than fragmented.
CSDDD's current text stipulates that companies found in breach of the directive will face regulatory penalties and stakeholder lawsuits. EU lawmakers have called for fines of at least 5% of a corporation's net global revenue. The measure would affect both larger European firms and companies outside the region that have sales of more than €150 million, with at least €40 million in the EU.
Lara Wolters, the EU Parliament member responsible for ushering CSDDD through the chamber, has said she's bracing for a "tough" battle with the finance industry. She also said there's too much at stake for lawmakers to cave.