In 14 December 2023, the Council of the European Union and the European Parliament agreed on a compromise text for the Corporate Sustainability Due Diligence Directive (“CSDDD”). Very much like the Corporate Sustainability Reporting Directive (CSRD), the CSDDD aims to facilitate the transformation of the European Union into a sustainable and competitive economy. The CSDDD contributes to this objective by requiring companies to conduct human rights and environmental due diligence and by the introduction of a liability scheme in case of non-compliance with its obligations.
Especially the liability scheme as well as the possible impact of the CSDDD on the remuneration of directors1 caused for heated discussions between the two institutions. It took up to three rounds of trilogues to come up with a compromise text. Although this text is not yet available, we can learn a lot from the press releases issued by the Council and the Parliament.
Scope
The CSDDD focuses on large companies: EU companies with more than 500 employees and a worldwide turnover of more than EUR 150 million, as was initially proposed by the Commission. EU companies in certain high-risk sectors (manufacture and wholesale trade of textiles, clothing and footwear, agriculture including forestry and fisheries, manufacture of food and trade of raw agricultural materials, extraction and wholesale trade of mineral resources or manufacture of related products and construction) with more than 250 employees and a turnover of more than EUR 40 million also fall within the CSDDD's scope. Whether or not these lower thresholds should be limited to certain sectors was also part of the debate between the institutions. Although the Parliament initially voted against it, it seems that this limitation was reintroduced.
The applicability for non-EU companies is determined by their net turnover generated in the EU, with a threshold of EUR 300 million, deviating from the original Commission proposal of using the same EUR 150 million threshold as for EU companies. The press releases contain no information on non-EU companies in high-risk sectors. The Commission will have to publish a list of non-EU companies to which the CSDDD applies. No information on the discretion enjoyed by the Commission in drawing up this list is available yet.
The CSDDD will also result in indirect obligations for medium-sized and smaller companies that are the business partners of or form part of a supply chain in connection with a company that formally falls within the scope of application of the CSDDD.
The institutions also had to decide on a controversial element of the ongoing discussions, namely the applicability of the CSDDD to the financial sector. The Council and Member States pushed for a wide exclusion, but a compromise seems to have been found. The text that was agreed on contains a review clause allowing for future inclusion of all activities of the financial sector based on a sufficient impact assessment.
Material obligations
As stated, the CSDDD imposes due diligence obligations on large companies with regard to their actual and potential adverse impacts on human rights and the environment. This includes identifying, preventing, mitigating and ending those impacts by taking “appropriate measures". The CSDDD ultimately clarifies that companies may be required to end their business relations with those business relationships causing the impacts, but this measure must be seen as a “last resort". These obligations also apply with respect to in-scope companies' whole value chains, although there is no information yet on whether the agreement's definition of “value chain" casts a wide or rather limited net.
The institutions also decided to expand the list of what may qualify as impacts on human rights and the environment in Annex I to the CSDDD, i.a. with regard to vulnerable groups, core International Labour Organisation (ILO) Conventions (once ratified by all Member States), civil and political rights, economic, social and cultural rights, and the rights of the child.
Moreover, all in-scope companies including the financial sector, will have to adopt a plan ensuring their business model complies with limiting global warming to 1.5°C. The management of companies with more than 1000 employees will receive financial benefits for implementing the plan. Details on this benefits mechanism (such as to whom it applies (the original proposal mentioned "directors" as opposed to the "management"), whether it is mandatory, and whether it could also negatively affect remuneration) are not available yet.
Public and private enforcement
In terms of enforcement, the CSDDD gears up supervisory authorities in Member States with the power to launch inspections and investigations and impose penalties including “naming and shaming" and fines of up to 5% of net worldwide turnover.
With regard to the civil liability for damage, resulting from non-compliance with the CSDDD, it is important to note that the CSDDD scheme will be in place in addition to any other existing liability scheme. Victims, but also unions or civil society organisations, will have standing to bring such claims. The institutions have set the limitation period for claims at 5 years. The agreement also limits the requirement to disclose evidence, the possibility to impose injunctive measures, and the cost of the proceedings for claimants.
The CSDDD also provides that compliance with the Directive can be used as a criterion for the award of public contracts and concessions.
The Commission also proposed to initiate a duty of care for directors to consider the impact of their decisions on sustainability issues when fulfilling their duty to act in the best interest of the company. The Council heavily opposed to this idea. It is not clear whether this duty of care made it into the final text.
Next steps
The full text as agreed upon will be made publicly available. In a next stage, this text will have to be endorsed and formally adopted by both institutions, after which the CSDDD will be published and can enter into force. It is then up to the Member States to transpose the CSDDD into national law.
1In the Commission proposal, “director" refers not only to members of the board of directors, but to any member of the administrative, management or supervisory bodies of a company, the chief executive officer, the deputy chief executive officer, and other persons who perform similar functions.
