Introduction

The CSDDD was provisionally agreed at a political level in December 2023, confirmed by COREPER in a revised form in March 2024 and subsequently approved by the European Parliament. An overview of this text is available here. The final text of the CSDDD is now pending formal adoption by the Council of Ministers before being formally enacted.

The CSDDD forms part of the "European Green Deal" and includes climate protection measures going beyond the protection of human rights or environmental interests in supply chains. In accordance with the CSDDD, companies will have to adopt and put into effect a transition plan for climate change mitigation that aims to ensure the compatibility of their business model and strategy with the transition to a sustainable economy and with the target of limiting global warming to 1.5 °C in line with the Paris Agreement. Companies' transition plans will have to include precise climate targets and planned key actions and investments to reach these targets, as further explained below.

In this article, we provide an overview of the specific requirements and implications of the obligation to adopt a Climate Transition Plan under the CSDDD, as well as some recommendations for what companies should do to prepare.

Who must adopt a Climate Transition Plan?

Generally, all companies that fall within the scope of the CSDDD will have to adopt a Climate Transition Plan, i.e., mainly EU companies with more than 1,000 employees and a net worldwide turnover of more than EUR 450 million and non-EU companies with a net turnover of more than EUR 450 million in the EU. For a more detailed explanation of the CSDDD's scope of application, please see our previous article here.

However, some companies may be exempted from the obligation to adopt a Climate Transition Plan. There are two possible exemptions, as follows:

• The first possible exemption applies to subsidiaries. Parent companies may adopt Climate Transition Plans on behalf of their subsidiaries that fall within the scope of the CSDDD. However, even in such a case, the subsidiaries still need to comply with the substantive obligations relating to climate change in accordance with the parent company's Climate Transition Plan and its specific targets.
• A second possible exemption applies to holding companies. Where the ultimate parent company has as its main activity the holding of shares in operational subsidiaries and does not engage in taking management, operational or financial decisions affecting the group or the subsidiaries, it may be exempted from the obligations under the CSDDD generally, including the adoption and implementation of the Climate Transition Plan (provided that one of the ultimate parent company's subsidiaries established in the EU is designated to fulfill the obligations, including the adoption of a Climate Transition Plan).

The obligations to "adopt" and "put into effect" a Climate Transition Plan

Article 15 of the CSDDD is the key provision in relation to climate change. It requires that member states ensure that covered companies "adopt and put into effect a transition plan for climate change mitigation (…)", thereby imposing, in effect, two separate obligations on companies.

First, companies will have to adopt a "transition plan for climate change mitigation" ("Climate Transition Plan"). The design of the Climate Transition Plan is subject to a number of ambitious requirements.

• In terms of objectives, the Climate Transition Plan must aim "to ensure, through best efforts, that the business model and strategy of the company" are compatible with the following:
  • The transition to a sustainable economy
  • The limiting of global warming to 1.5 °C in line with the Paris Agreement
  • The objective of achieving climate neutrality as established in the European Climate Law (Regulation (EU) 2021/1119), including the following:
    • 2050 climate neutrality targets
    • Intermediate (i.e., 2030 and 2040) targets

It is worth noting that achieving compatibility with these objectives represents a higher level of ambition than that of many other climate transition plans, as the latter often rely on the Paris Agreement's 2°C target (rather than the 1.5°C target) as an objective. The requirements of compatibility with the EU's 2050 target and intermediate climate targets and with the "transition to a sustainable economy" will also warrant careful attention to determine whether and how they require the ambition and objective of existing plans to be adapted.

• In terms of content, the Climate Transition Plan must contain the following:
  • Time-bound targets related to climate change for 2030, 2035, 2040, 2045 and 2050, based on "conclusive scientific evidence" and including, "where appropriate, absolute emission reduction targets for greenhouse gas for scope 1, scope 2 and scope 3 greenhouse gas emissions for each significant category"
  • A description of (i) the "decarbonisation levers identified" and (ii) the "key actions planned" in order to reach such targets, including, "where appropriate, changes in the (…) product and service portfolio and the adoption of new technologies"
  • An "explanation and quantification of the investments and funding" that will serve to support the implementation of the Climate Transition Plan
  • A description of the role of the administrative, management and supervisory bodies with regard to the Climate Transition Plan

Given the abundant use of the wording "where appropriate," it is clear that companies have a margin of appreciation in designing their Climate Transition Plan in a way that is meaningful for their sector, business and specific circumstances. Such appreciation will, however, be subject to regulatory oversight and scrutiny (see below).

The Climate Transition Plan must be updated every 12 months and contain a description of the progress the company has made toward achieving its targets.

The CSDDD also provides that companies that report a transition plan in accordance with the Corporate Sustainability Reporting Directive ("CSRD") "shall be deemed to have complied with the adoption obligation." In other words, while the content requirements of the CSDDD themselves are quite open-ended, it provides an incentive to companies to comply with the — much more detailed — content requirements of the CSRD's climate plan provisions by providing a sort of "safe harbor" provision for those that report in accordance with that framework.

Having designed and adopted their Climate Transition Plan, companies are required to "put [them] into effect."

Recital 50 is clear that this should "be understood as an obligation of means and not of results" and that "[w]hile companies should strive to achieve the GHG emission reduction targets contained in their plans, specific circumstances may lead to companies not being able to reach these targets, where this is no longer reasonable." It is clear that, where a company fails to achieve the targets set out in its Climate Transition Plan, the question of whether it has actually "made its best efforts" in compliance with its obligation of means will be a subject of scrutiny and debate. The precise standard that will apply in such cases remains to be established, however.

Upcoming guidance on Climate Transition Plans

To support companies with their Climate Transition Plans, the European Commission — in consultation with member states and other relevant stakeholders — is tasked with issuing practical guidance on those plans. Such guidance must be made available 36 months after the entry into force of the CSDDD, i.e., likely in 2027.

In preparing its guidance, it is reasonable to expect that the European Commission will assess current market practice, taking into account, among others, how companies have designed their existing plans until now by relying on voluntary sustainability standards and frameworks. In this regard two recent developments are noteworthy.

• First, the European Financial Reporting Advisory Group (“EFRAG”) — the organization advising the European Commission on the adoption and implementation of the CSRD — has communicated that it is currently drafting implementation guidance on the Climate Transition Plans to be disclosed under the CSRD. Given that companies reporting a Climate Transition Plan in accordance with the CSRD are deemed to have complied with the CSDDD's adoption obligation, the EFRAG's guidance may well influence the European Commission in drafting the CSDDD-specific guidance.
• Second, it remains to be seen what the treatment of carbon offsets in those plans and guidance will be. Indeed, recent attempts to extend the use of carbon offsets by the Science Based Targets initiative (SBTi) have caused significant controversy within the SBTi's Board of Trustees. Since SBTi is one of the key voluntary frameworks for the design of Climate Transition Plans, this debate on the use of carbon offsets within such plans should be closely monitored. 

Interaction of the CSDDD's climate obligations with other EU legislation

The CSDDD is not the only new EU law that has key provisions relating to climate transition plans.

One of the most critical points of interaction between the CSDDD requirements for Climate Transition Plans and other EU legislation is likely to arise with respect to Directive (EU) 2024/825 on "empowering consumers for the green transition" ("ECGT Directive"). This directive, which entered into force on 26 March 2024, introduces significant changes to the Unfair Commercial Practices Directive (2005/29/EC) that will apply from 27 September 2026 to any company engaged in business-to-consumer commercial practices.

In particular, under the ECGT Directive, a commercial practice will be considered misleading if it involves a claim made about future environmental performance (e.g., "climate neutral by 2050") without clear, objective, publicly available and verifiable commitments. Any company that is subject to both the CSDDD and the ECGT Directive will need to ensure that all claims made in its Climate Transition Plan concerning the company's future climate performance constitute clear and objective commitments. The ECGT Directive requires that these commitments be set out in a detailed and realistic implementation plan, with measurable and time-bound targets and other relevant elements necessary to support the plan's implementation (such as sufficient allocation of resources). Notably, the plan must be regularly verified by an independent third-party expert whose findings are made available to consumers.

This interaction between the CSDDD and the ECGT Directive will bring an even greater level of rigor to the contents of Climate Transition Plans as well as the additional requirement that future performance claims within these plans must be independently verified. There is also a heightened enforcement risk, with Climate Transition Plans being exposed to potential "misleading commercial practice" claims if the requirements of the ECGT Directive are not met.

Enforcement and compliance

The CSDDD requires each member state to designate one or more supervisory authorities to supervise compliance with the obligations laid down in national provisions adopted pursuant to the CSDDD, including those relating to Climate Transition Plans.

• For EU companies, the competent supervisory authority is the supervisory authority of the member state in which the company has its registered office.
• For non-EU companies, the competent supervisory authority depends on a number of factors.
  • If the non-EU company only has one branch, the competent supervisory authority is that of the member state in which the company has this branch.
  • If the non-EU company does not have a branch in any member state or has branches in different member states, the competent supervisory authority will be the supervisory authority of the member state in which the company generated most of its net turnover in the EU in the financial year preceding the last financial year.

As a result, this means that non-EU companies can, at least to some extent, "forum shop" their national competent supervising authority by establishing a branch in a specific member state, based on suitability criteria due to the priority of the branch over the largest net turnover in the EU provided for in the CSDDD.

To create a level playing field for EU supervision of CSDDD standards, member states must ensure that their national supervisory authorities have adequate powers and resources to supervise the adoption and design of the Climate Transition Plans in line with CSDDD requirements. Finally, member states must ensure that their supervisory authorities publish an annual report on their CSDDD activities and make it available online on a website to ensure uniform and effective enforcement of CSDDD standards by national supervisory authorities within the EU.

The sanctions issued by supervisory authorities in the event of an inadequate Climate Transition Plan under the CSDDD must be effective, proportionate and dissuasive. The maximum fine — including in the case of an inadequate Climate Transition Plan — is, depending on the degree of culpability of the company for the breach of the CSDDD standard, at least 5% of the relevant company's global net turnover in the financial year preceding the decision to impose the fine. Such sanctions also damage the reputation of the companies concerned and their brands, because the decisions of the national supervisory authorities containing sanctions in connection with infringements of the national regulations adopted to implement the CSDDD — such as an inadequate Climate Transition Plan — must be made publicly available for at least five years as part of the naming and shaming practice under the CSDDD.

Next steps and recommendations

Following the final approval of the CSDDD by the EU's co-legislators, member states will be required to adopt regulations and administrative provisions necessary to align national laws with the provisions of the CSDDD.

The final version of the CSDDD contains a number of changes to the previous compromise, and the compromises that have been agreed during those complex negotiations have scaled down the ambition of the CSDDD. Member states that supported the initial version of the CSDDD could try to introduce stricter obligations and more rigid provisions, possibly along the lines of the original text of the CSDDD, with reference also to those provisions that have been dropped in the approved CSDDD, such as: (i) the scope of the obligation to adopt the Climate Transition Plan; (ii) the requirement to offer financial incentives to managers relating to the climate transition; and (iii) the imposition of directors' duties to take into account the consequences of their decisions on climate change.

The national regulations, together with all other EU legislative acts, will be transmitted to and reviewed by the Commission. The Commission must submit a report to the Parliament and the Council on the necessity to lay down additional sustainability due diligence requirements tailored to regulated financial undertakings with respect to the provision of financial services and investment activities. This report must include the options for such due diligence requirements as well as their impacts on climate change, since companies in the financial sector are obliged to adopt a Climate Transition Plan.

Regardless of how member states choose to transpose and implement the CSDDD principles, in-scope businesses should promptly and carefully prepare to meet the requirements and adopt their Climate Transition Plans.

• Consider your existing climate neutrality plan to determine potential gaps: The first preparatory step will of course be to determine how your company's current Climate Transition Plan (if any) overlaps with the requirements of the CSDDD.
• Consider the impact on your value chain and procurement function, as well as the need to adapt your processes and contracts: Many Climate Transition Plans will have to include targets for Scope 3 emissions for 2030 and in subsequent five-year intervals until 2050, including the progress made to meet the relevant targets. Scope 3 includes all (other) indirect emissions that occur in the upstream and downstream activities of the business. Most businesses have already adopted due diligence processes to select and qualify suppliers and partners, and those policies are well incorporated into their business models. It will be crucial to review and adapt existing policies and models to enhance alignment with the upcoming obligations under the CSDDD and the Climate Transition Plan, including data sharing and collection throughout the value chain. Businesses that have not yet implemented any supplier qualification process will need to start from scratch. In any event, all businesses must ensure coherence and coordination throughout their entire internal system and policies.
• Align strategic planning and communication: Businesses should ensure robust communication and coordination among functions and departments in charge of collecting data, ensuring compliance and communicating externally (especially on climate-related matters). Indeed, it is of the essence that all public claims, announcements and reporting are aligned and consistent (or at least are not contradictory) in order to reduce the risk of misunderstanding or misinterpreting the information. This alignment is crucial to meet the growing demand for transparency and clarity from stakeholders, including NGOs and regulators. All climate-related initiatives (e.g., CSRD, CBAM) could be envisioned as a puzzle, where each piece must be meticulously connected to create a clear overall picture. Businesses should align their commitments, strategies and actions to achieve effective and useful policies on climate change.

In-scope businesses should raise awareness among SMEs, which are not directly subject to CSDDD obligations but will be crucial for achieving Scope 3 emissions reduction targets. These SMEs may lack the necessary resources or expertise to meet the emissions reduction goals that may be imposed by in-scope businesses to meet their own Scope 3 targets. SMEs should be supported through specific training and tools to familiarize them with the upcoming requirements and guide them through the complex climate transition journey.