On 14 December 2023, the European Council[1] and the European Parliament[2] announced that they have reached a provisional agreement on the new Corporate Sustainability Due Diligence Directive (“CSDDD“), which sets out obligations for companies to mitigate their negative impact on human rights and the environment, around issues such as child labor, slavery, labor exploitation, biodiversity loss, pollution and environmental degradation. This provisional agreement marks a significant milestone in the legislative process of introducing the CSDDD with its new and far-reaching mandatory human rights and environmental due diligence obligations. It clarifies the scope of the CSDDD, the liabilities for noncompliant companies and the penalties for noncompliance.
What is next?
The provisional agreement reached between the European Council and the European Parliament now needs to be endorsed and formally adopted by both institutions. Once published in the Official Journal, the CSDDD will enter into force 20 days after publication and member states will have two years to transpose the provisions of the CSDDD into national law.
We are currently awaiting the publication of the full text of the provisional agreement. In the meantime, we have outlined some key highlights below.
Background
On 23 February 2022, the EU Commission proposed the CSDDD. The CSDDD includes obligations for large companies regarding actual and potential adverse impacts on the environment and human rights for their business chain of activities, which covers the upstream business partners of the company and partially the downstream activities. Since 23 February 2022, the EU Council has adopted its negotiating position on the CSDDD, followed by the European Parliament. After that the European Parliament adopted its position, trialogue negotiations between the European Parliament, the EU Commission and the EU Council on the final text of the legislation took place.
Key points discussed in the negotiation process included the scope of the CSDDD, including which companies that would be subject to the obligations set out in the CSDDD and the scope of the applicable obligations. The provisional agreement between the EU Council and the European Parliament marks the end of the extensive trialogue discussions and signals the next step toward a final legislative product in the area of companies’ due diligence with respect to the environment and human rights.
Scope of the directive
The provisional agreement settles the scope of the directive on companies that have more than 500 employees and a net worldwide turnover exceeding EUR 150 million. In addition, the scope covers companies that operate in specific high-impact sectors (e.g., manufacture and wholesale trade of textiles, and clothing and footwear) with more than 250 employees and a net global turnover of EUR 40 million. For non-EU companies, the CSDDD will apply if they have more than EUR 150 million net turnover generated in the EU, three years from the entry into force of the CSDDD.
Small and medium-sized enterprises do not fall directly under the scope of the CSDDD. However, we expect the CSDDD to have a significant impact on many companies that are not themselves directly subject to the scope of the directive but are part of the upstream or downstream value chain of the companies that do fall under the scope of the CSDDD.
The financial sector is excluded
Whether or not the financial sector should fall under the scope of the CSDDD was a key point in the trialogue negotiations. Reportedly, according to the provisional agreement reached earlier in December, financial services will be temporarily excluded from the scope of the CSDDD, with regard to external due diligence. However, there will be a review clause for a possible future inclusion of the financial downstream sector based on a sufficient impact assessment.
Civil liability, transition plan and penalties
The CSDDD includes the possibility of civil liability. It enables affected parties to directly file claims against companies for damages stemming from human rights violations or environmental harm within the value chain. The CSDDD includes the obligation to adopt a plan ensuring the companies’ business models comply with limiting global warming to 1.5°C. This obligation will also apply to the financial sector.
Another enforcement mechanism provided for by the CSDDD are sanctions imposed by the competent national authorities in case of a violation of due diligence obligations. The authorities will be able to launch inspections and investigations and impose penalties on noncompliant companies, including “naming and shaming” and fines of up to 5% of their net worldwide turnover.
[1] Corporate sustainability due diligence: Council and Parliament strike deal to protect environment and human rights – Consilium (europa.eu).
[2] Corporate due diligence rules agreed to safeguard human rights and environment | News | European Parliament (europa.eu).
