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Firms impacted
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All EU-listed companies including subsidiaries with over 250 employees, or over €40 million in annual revenue, or over €20 million in total assets.
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Companies with more than 1,000 employees and a net worldwide turnover over €450 million – including their operations, subsidiaries and value chains. To be phased in from 2027 to 2029 and first applied to larger companies.
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Implementation and enforcement
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Third-party accredited audit required.
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Phased in between 2027 and 2029. Member states impose fines and compliance orders, and enable victim compensation for damages.
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Reporting requirements
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Discloses and ensure auditing of information related to business model, strategy and supply chains as laid out in the European Sustainability Reporting Standards (ESRS).
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Companies: Identify, prevent and account for negative human rights and environmental impacts (defined as any measurable environmental degradation, such as harmful soil change, water or air pollution, harmful emissions or excessive water consumption); adopt a climate transition plan compatible with the 1.5°C climate target.
Directors: Set up and oversee due diligence implementation; consider consequences of decisions in ‘best interests’ of company.
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The extent of reporting required – the ESRS
The European Sustainability Reporting Standards (ESRS) set the disclosure requirements for the CSRD. The initial draft of these standards proposed by the European Financial Reporting Advisory Group had the potential to reduce Europe’s water footprint, as it included mandatory reporting on water and marine resources, pollution, and biodiversity and ecosystems, among others. However, the final standards adopted by the European Commission in July 2023 were weakened in member state negotiations, potentially limiting the CSRD’s ability to encourage more sustainable water footprints in trade. Companies must still assess and disclose financial and impact materiality, but it is now voluntary to explain why certain areas are deemed material or not, including water and marine resource reporting. As noted by a public statement from a coalition of financial actors, ‘it would be up to corporates, supported by their consultants and advisers, to determine what is, and isn’t, material to report’. Furthermore, disclosures on biodiversity and the welfare and protection of agency or contracted workers are voluntary.
Limitations to enforcement and compensation – the CSDDD
Introduction of the CSDDD would be a groundbreaking piece of legislation in terms of enforcement, but experts have pointed out limitations for water. First, cases must relate to the breaking of existing environmental or human rights conventions. Due to the lack of binding international agreements on water, it may be difficult to use the CSDDD in water-related legal challenges. Second, the CSDDD can be seen as the EU encroaching into corporate law, which is usually a member state competence, leading to legal questions and opposition. Third, some civil society actors have criticized the CSDDD for being too narrow and covering too few companies, as well as having ‘mostly given up on its original plans for directors’ obligations and accountability to shareholders’. Although the CSDDD was expected to pass in February 2024, Germany and then Italy opposed the final proposal; the Council of the European Union adopted a watered down version of the directive in March 2024. The main changes were to increase the size of companies to which legislation would apply and to lengthen the timeline for phase-in.
New sector-specific due diligence requirements that may affect water use
The EU has also developed sector-specific legislation to combat deforestation in supply chains for certain products including palm oil, cattle, timber, coffee, cocoa and soy, as well as derived products like leather. Deforestation increases stress on water, as trees play an important role in delivering rainwater to underground aquifers and help prevent desertification and reduce the risks of soil erosion and landslides in the event of heavy rainfall. Therefore, policies to fight trade-driven deforestation can have positive impacts on water systems. The regulation on deforestation-free products, which entered into force in June 2023, requires that operators and traders verify their compliance with EU standards. Responsibility for checking product supply chains to ascertain whether traders are following due diligence laws lies with member state authorities.
Deforestation increases stress on water, as trees play an important role in delivering rainwater to underground aquifers and help prevent desertification and reduce the risks of soil erosion and landslides in the event of heavy rainfall.
In addition, the new EU batteries regulation, which entered into force in August 2023, requires due diligence according to the Organisation for Economic Co-operation and Development (OECD) standards for minerals from high-risk areas, including social and environmental risks. Because the mining sector is a major contributor to water stress and pollution, the standard’s inclusion of risks to the environment along the supply chain has the potential to encourage sustainable water use. This builds on the 2017 EU conflict minerals resolution, which did not have environmental provisions but aimed to prevent human rights violations from the minerals sector. NGOs have criticized the 2017 conflict minerals resolution for failing to address human rights abuses because of the lack of member state compliance and enforcement. As the sustainable batteries regulation will also be enforced at the member state level, there is a risk that it has the same weaknesses as the 2017 resolution. The 2017 resolution set up mechanisms for compliance support, including the European Partnership for Responsible Materials. Lessons learned from this partnership could support the broadened due diligence standards for batteries.
Member state acts
In addition to EU measures, member states have enacted their own policies such as the French 2017 Corporate Duty of Vigilance Law, which requires companies to identify and prevent severe risks to human health and the environment. This law has been used to challenge water rights violations. Germany’s 2023 Act on Corporate Due Diligence Obligations in Supply Chains aims to prevent human rights violations and includes penalties for non-compliance and violations. This may address water issues because it includes environmental protection ‘where environmental risks can lead to human rights violations’, such as water that is poisonous for human consumption or chemicals that are dangerous for people or the environment. However, these are all new pieces of legislation and have yet to be tested through legal cases. Until then, it is unclear whether they will directly affect practices regarding water sustainability, although the trend points to more scrutiny and penalties for violations in EU supply chain regulations.
UK legislation
The UK is another major importer of virtual water, and the country has signalled its commitment to sustainability disclosures. Compared with the EU, the UK has fewer laws and policies that address its international supply chains, and the present government is not planning on replicating EU commitments as it sees the current regime as sufficient.
Experience with the 2015 Modern Slavery Act
The UK has experience of mandating disclosure in international supply chains through the 2015 UK Modern Slavery Act. This legislation requires large businesses with a yearly turnover of £36 million or more to publish annual ‘modern slavery statements’, in which companies report on their progress to identify and address slavery risks in their operations and supply chains. There are no financial or legal penalties for failing to comply with reporting requirements, which can be as simple as stating ‘there are no slavery risks’, although the UK secretary of state (in practice the home secretary) has the power to apply for an injunction requiring companies to disclose further information. In 2021, the UK House of Commons published a report assessing Uyghur forced labour, which notes that modern slavery statements are not monitored and argues that there should be fines for non-compliance, concluding that ‘the Modern Slavery Act is out of date, has no teeth, and we do not accept that businesses should be excused from doing basic due diligence’. This experience shows the challenge of addressing the human rights impacts of trade using due diligence measures without enforcement measures. Subsequently, trade measures to address the UK’s water footprints would likely face similar difficulties.
Enforcing the 2021 Environment Act – a work in progress
The UK’s 2021 Environment Act may influence the UK’s supply chains for forest products as well as the country’s water footprint (as deforestation has negative impacts on water systems). The Environment Act made it unlawful for UK companies to use products (including cattle, cocoa, coffee, maize, palm oil, rubber and soy) from land that was illegally converted or occupied, and proposed due diligence requirements. The detailed due diligence requirements, the scope of these regulations and the enforcement mechanisms have all yet to be determined. Civil society groups have critiqued the act’s definition of illegal, which only applies to the producer country’s laws and not the UK’s, because it would not prevent illegal deforestation in the Brazilian Amazon. At the same time, the Brazilian government argued the act could harm trade and might not be WTO-compatible. According to the Department for Environment, Food and Rural Affairs (Defra), the principles set out in the act should be implemented in additional legislation at the earliest possibility following consultation in June 2022. Another piece of legislation, the 2023 Financial Services and Markets Act, requires a review of whether the UK financial system is adequate to eliminate financing of illegal forest risk commodities. However, proposed due diligence measures have not been included in the final act or further legislation as of February 2024.
Towards disclosures, but no enforcement mechanisms yet
In 2022, the UK government mandated disclosure on climate-related financial information in line with recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD).
The UK’s Sustainability Disclosure Requirements for financial products and firms within the UK could encourage wider company disclosures on sustainability related issues and eventually impact investment patterns.
However, reporting on climate risks including water metrics is not mandatory, and the UK Financial Conduct Authority’s review of TCFD-aligned disclosures found that companies tend to focus on greenhouse gas emissions rather than other environmental impacts. The UK’s Sustainability Disclosure Requirements (SDRs) for financial products and firms within the UK, published in November 2023 and due to come into force in December 2024, could encourage wider company disclosures on sustainability related issues and eventually impact investment patterns. These standards align with the IFRS SDRs, and financial companies will be obliged to disclose sustainability objectives, progress towards these objectives and, in some cases, investment policy and management approaches, as well as label their products accordingly. However, measures only apply to companies within the UK, although there is scope to extend to overseas finance companies in future. Notably, neither disclosure of principal adverse impacts nor independent verification are required. The lessons learned from the Modern Slavery Act suggest that the SDRs and TCFD will have limited relevance for embedded water in international trade without setting basic reporting requirements or ensuring independent verification.
Despite various pieces of related legislation to tackle sustainability and social issues, it remains to be seen how effective the UK will be at addressing the negative impacts of trade on water. If secondary legislation is created, the UK’s Environment Act could limit water footprints indirectly by reducing UK demand for forest products from deforestation that harms ecosystems and water cycles. While it may not have a direct impact on water, the Modern Slavery Act can be used to prosecute labour violations and shows the importance of including enforcement mechanisms in any further legislation. The SDRs can encourage disclosure of sustainability objectives, but without independent auditing its impacts may be limited. Compared to the EU, this legislation covers fewer value chains, is less detailed and has fewer enforcement mechanisms. This approach decreases the burden on businesses but is less likely to encourage sustainable water footprints.
Setting standards for market access
Countries have long placed conditions on access to their markets and used standards for public procurement to build demand for desirable goods. Due to the principles of openness and fair competition, enshrined in the WTO’s GATT, there are legal and political considerations to this approach. Under the WTO Technical Barriers to Trade agreement, countries can develop their own standards, but these must not be discriminatory and not create unnecessary trade barriers (see Box 6). From a political point of view, if standards are used internationally and are already understood by different actors, like businesses, they may be more acceptable as conditions for market access. A key barrier to applying market access conditions related to water is that there are no international treaties on water that are comparable to international agreements on human rights or climate change. Without an international agreement on water, it is necessary to explore creative ways of tying sustainable water use to market access and the available legislation.