As part of the European Green Deal, the European Commission proposed the Corporate Sustainability Due Diligence Directive (“CSDDD” or the “Directive”) on 23 February 2022, with the aim to introduce a new requirement on companies to conduct sustainability due diligence across their operations, subsidiaries and value chain. Under the CSDDD, in-scope companies will be required to establish due diligence processes to identify, prevent, mitigate and address the potential negative impacts on the environment and human rights. In-scope companies will also be required to report on their due diligence efforts and the outcomes.
As the Council of the European Union (the “Council”) and the EU Parliament had different positions on the CSDDD, the trilogue negotiations lasted until that agreement of a provisional text was reached on 14 December 2023. This final version was approved by a qualified majority within the EU Parliament and sent to the Council on 28 February 2024 for approval.
Although the proposal was in an agreed form, the Council rejected the text, with a veto from Germany and further negotiations, namely on the scope of the companies that would be subject to the subsequent due diligence obligations introduced by the Directive.
After multiple postponements, the Council’s Permanent Representation Committee eventually gave its approval regarding the CSDDD with new adjustments to the text on 15 March 2023.
1) Fewer in-scope companies and staged application
The last version of CSDDD was covering EU and non-EU entities with (i) 500 employees or more and (ii) a net turnover of EUR 150 million or more worldwide. In addition, the proposal of CSDDD provided another category of companies, from specific sectors that were deemed to have a high risk on the environment and human rights (so-called “high impact sectors”). These companies were automatically included in the scope of CSDDD if they had (i) more than 250 employees and (ii) a net turnover exceeding EUR 40 million worldwide.
The version approved by the Council on 15 March increased the general thresholds and removed the specific threshold for the category of “high-impact” companies. As a result, only companies with (i) 1,000 or more employees and (ii) a net turnover of EUR 450 million or more will fall into the scope of CSDDD. This “high-risk” sector approach is however subject to a review clause, offering the possibility to be introduced in the CSDDD at a later date.
In addition, the Council suggests including a staged approach, starting with the largest companies which will be subject to a three-year application period, when they have more than 5,000 employees and a turnover over 1,500 million. Smaller in-scope entities will be subject to a four-year application period for companies with more than 3,000 employees and 900 million net turnover or a five-year application period for companies with more than 1,000 employees and 450 million turnover.
2) Applicability to the financial sector
Following the approval by the Council, regulated financial undertakings will still be included in the scope of CSDDD but only for the upstream part of the supply chain. References to the specificities of the financial sector in the due diligence process have been deleted.
That said, there will be a review clause according to which, the Commission is to submit a report to the EU Parliament and the Council on the need for additional due diligence requirements tailored to the financial sector.
The last version of CSDDD, as approved by the Council, introduced the obligation of adopting and implementing a climate transition plan for climate change mitigation in line with the Paris agreement, applicable for all in-scope companies, while clarifying that (i) companies in-scope of CSRD will be exempt from this obligation and (ii) the financial sector companies are subject to the obligation of adopting and implementing a transition plan.
3) Enforcement of CSDDD: supervision and civil liability
In-scope entities will be subject to a double layer of enforcement process: an administrative supervision with consequent sanctions in case of breach and a civil enforcement, whereby companies may be held liable for damages caused to a natural or legal person, in case of (i) intentional or negligent failure to comply with obligations under the CSDDD, and (ii) such failure caused damages to the natural or legal person’s legal interest protected under national law.
The adjusted version confirmed this double layer enforcement, while clarifying that companies may not be held liable for damages caused by business partners in the supply chain. A minimum period of five years to bring claims was introduced.
4) Other adjustments
It is also worth noting that the duty of care of the directors of in-scope companies for setting-up and overseeing due diligence was eliminated in the new, adjusted version, together with the obligation to terminate a business relationship with a company responsible for adverse impacts in the value chain, which cannot be prevented or ended.
Termination is only regulated as a last resort solution, where the in-scope company itself would set an appropriate timeframe in its prevention or corrective action plan and where the termination is assessed as to whether there would be manifestly more severe adverse impacts of doing so.
Finally, the Council introduced the obligation of a meaningful engagement with stakeholders by incorporating the time and manner in which consultations take place in the due diligence process.
The next step is for the European Parliament’s Committee on Legal Affairs to vote on the final text of the CSDDD. Thereafter, the CSDDD will be voted on in the plenary session of the European Parliament, which is planned for April 2024.
