What is CSDDD?
On 23 February 2022, the European Commission published its proposal for a Directive on corporate sustainability due diligence (the “Proposal”), which aims to foster sustainable and responsible corporate behaviour throughout global value chains. The Proposal requires in-scope companies to identify, and, where necessary, prevent, mitigate or end, any actual or potential adverse impacts that their operations, and the operations of entities in their extended supply chains, have on human rights and the environment. This is in addition to the reporting obligations that currently exist and requires active steps, including as significant as termination of a material contract.
What is covered?
Although the Directive does not specifically target infrastructure or energy companies, for those in-scope it will significantly change the approach they must take to their supply chains, and their accountability for them. It will also affect those that operate in the supply chains of in-scope companies. As many contractual relationships are long term, thought will need to be given well in advance as to how the changes needed will be implemented.
Timing and positions taken
We reported on the Proposal when it was first published last year.
The Proposal must be agreed with the European Council and the European Parliament. On 1 December 2022, after extensive debate and negotiation among Members States, the Council formally adopted its negotiating position on the Proposal; and, on 1 June 2023, after similarly lively debate and negotiation, the EU Parliament did the same.
There are important differences in the positions taken by the Council and the EU Parliament but they agree that it will include companies formed within and outside the EU. This update identifies at a high level some of the key areas that will be the subject of negotiation between the Commission, the Council and the EU Parliament as they move forward to agree the final text of the Directive later this year.
Once the Directive has been agreed and formally adopted, which is not expected until Q2 2024, Member States will have two years to transpose the Directive into national legislation.
Key issues for debate
Scope – thresholds and application timeline: The Proposal provides for certain ‘large’ companies formed within and outside of the EU to be in scope of the Directive. While the concept that the Directive should apply to companies outside the EU has been accepted by the Council and the EU Parliament, there are important differences in their respective negotiating positions as to the threshold criteria that will apply to determine whether a company is large enough, or has enough presence in Europe, to be in scope.
The Council's negotiating position contains largely the same thresholds in terms of employee number and net turnover as the Proposal, but to ensure proportionality of application, the Council has proposed a phased-in approach such that the rules of the Directive would first apply to very large companies only. The European Parliament’s negotiating position contains significantly lower thresholds both in terms of employee number (reduced from 500 to 250) and net turnover (reduced from EUR 150m to EUR 40m for EU companies), and allows for grouping, therefore extending quite significantly the scope of application of the Directive.
Scope – chain of activities: The Proposal relates to both the upstream and downstream value chain, from production to the end consumer – a “full life-cycle approach”. The Council has proposed the term “value chain” be replaced by a more neutral term, “chain of activities”, which is defined more narrowly to include the upstream supply chain and limited downstream activities, like transportation, distribution and disposal, but not the use of a company’s products or services by the end consumer, on the basis that it may be more difficult or potentially impossible for an entity within the scope of the Directive to monitor meaningfully. The EU Parliament supports the Commission’s full life-cycle approach, other than proposing some limitations in relation to regulated financial entities.
Financial services: Whether, and to what extent, the Directive will apply to the financial services sector is still to be determined, with the Council and the European Parliament taking different approaches to the Commission.
Directors’ duties: The Proposal introduces a director’s duty of care in relation to sustainability, obliging directors of in-scope companies to take into account the consequences of their decisions for sustainability matters. It also requires companies to link directors’ remuneration to the company’s achievement of sustainability targets in certain circumstances. The Council’s view is that directors’ duties should continue to be a matter for Member States and director remuneration, a matter for companies, and it has proposed that these provisions be deleted from the Directive. The EU Parliament supports the Commission’s approach to directors’ duties and a link between directors’ variable remuneration and sustainability but for large companies only.
Transition plans: The Proposal requires large in-scope companies (both EU and non-EU) to ensure that their business model and strategy is compatible with the transition to a sustainable economy and limiting global warming in line with the Paris Agreement. The Council’s position in in line with the Proposal but the EU Parliament is seeking to extend the transition plan requirement to all in-scope companies.
Civil liability: The Proposal introduces a new basis of civil liability, which would allow natural or legal persons affected by a company’s breach of its obligations under the Directive to make a claim for damages in certain circumstances on a strict liability basis. We reported on the litigation and regulatory risks arising from the Proposal last year.
To achieve more legal certainty, while also aiming to avoid unreasonable interference with Member States’ laws on non-contractual obligations (torts), the Council has proposed clarifications on the conditions that need to be met for a company to be held civilly liable so as to introduce a fault requirement. The Council has also proposed that rights to compensation should not lead to overcompensation, such as a right to punitive damages. The European Parliament’s negotiating position is in line with the Proposal’s strict liability approach.
It is expected that many companies will become obliged to conduct environmental and human rights due diligence across their chains of activity, whether under independent domestic legislation (as is already the case in France and Germany) or through the national implementation of the Directive (once agreed and in force). It is not yet clear how different legislative frameworks will interact but it will be important for companies to understand the scope of all applicable due diligence requirements to ensure compliance across the regulatory frameworks to which they are subject.
What should you do?
Companies that expect to be in scope of the Directive will need to start putting systems in place, including procedures and training, to enable them to comply with their due diligence obligations. This will involve dialogue across the value chain and potential changes to existing contractual arrangements to ensure adequate contractual protection is reflected. Companies not in scope of the Directive but who operate in the value chain of an in-scope company should also be prepared for new standards and compliance obligations in line with the Directive being passed through to them.
To check whether the Directive (as originally proposed by the Commission) might apply to your company and how ready your company is to comply with its requirements, click here to access the CMS CSDDD Navigator.