EU Reaches Provisional Agreement on Corporate Sustainability Due Diligence Directive

The Council of the European Union and the European Parliament have recently come to a tentative agreement on a new directive called the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D). This directive is a significant step forward in terms of corporate responsibility, as it outlines specific requirements for companies with regards to human rights and environmental due diligence. Here are the main components of this agreement:

Scope: Who Does it Apply To?

The CS3D will have a broad reach, applying to EU and non-EU companies that meet specific criteria based on turnover and number of employees.

EU Companies

• Large companies with over 500 employees and a net worldwide turnover exceeding €150 million.
• Companies with more than 250 employees and a net worldwide turnover surpassing €40 million, provided at least €20 million is generated in one or more high-risk sectors (such as textiles or agriculture).

Non-EU Companies

Non-EU companies with a net EU-wide turnover exceeding €150 million will also fall under the scope. However, these companies will be subject to the directive three years after it enters into force, with a published list by the Commission to identify those within its reach.

Small and Medium-sized Enterprises (SMEs)

SMEs are currently excluded from the scope of the Directive, although the due diligence efforts of larger companies could indirectly impact them.

Chain of Activities: A Comprehensive Approach

The CS3D mandates due diligence not only for a company's operations but also for those of its subsidiaries and business partners throughout the entire chain of activities.

Financial Sectors: Specific Inclusions

Financial sectors are included in the directive but are currently only required to conduct due diligence on their upstream partners. However, a review clause allows for the potential inclusion of downstream partners based on a "sufficient impact assessment."

Climate Change Mitigation: A Core Requirement

Companies covered by the CS3D must develop and implement a transition plan for climate change mitigation. This plan must align with efforts to limit global warming to 1.5°C. Larger companies with over 1,000 employees may tie additional financial incentives, such as variable remuneration, to successfully implementing their climate change mitigation plans.

Civil Liability and Penalties: Ensuring Accountability

The directive mandates that companies adhere to their due diligence obligations, and if they fail to do so, they can be held accountable. As a result, victims have the right to seek compensation for any damages incurred. However, companies are only liable if their actions were intentional or due to negligence. Those impacted by such actions, including trade unions and civil society organizations, have a five-year window to file claims. Companies that do not comply with the directive may be penalized with fines that could reach up to 5% of their net worldwide turnover.

Public Procurement: A Qualification Criterion

Compliance with the CS3D may become a qualifying criterion for awarding public contracts and concessions, further incentivizing adherence to sustainability and due diligence standards.

Directors' Duties: Notable Changes

The final agreement no longer contains the directors' duties proposed earlier.

What's Next?

The Council and Parliament are expected to formally adopt the final text in the first quarter of 2024 following technical negotiations. Once the directive comes into force, EU Member States will have two years to transpose it into national law, signalling a significant shift towards mandatory supply chain due diligence within the EU.

Mandatory Supply Chain Due Diligence in the EU

There are several supply chain due diligence regulations that are already in effect or under development in the EU. One of the latest is the CS3D. Other schemes include the Carbon Border Adjustment Mechanism (CBAM), Deforestation Regulation, Battery Regulation, Forced Labour Regulation, Conflict Minerals Regulation, Timber Regulation, Forest Law Enforcement, Governance and Trade (FLEGT) Regulation, and Kimberley Process Certification Scheme for conflict diamonds. All these schemes collectively aim to ensure that manufacturers have detailed information about their supply chains, promoting transparency and responsible practices in the EU market.