European Parliament And Council Reach Agreement On Corporate Sustainability Due Diligence Directive (CSDDD) - Climate Change

On 14 December 2023, the European Parliament and Council reached a provisional agreement on the long-awaited EU Corporate Sustainability Due Diligence Directive (CSDDD or the Directive), which will introduce a duty on companies to undertake human rights and environmental due diligence in their global value chains.

Background

The first draft CSDDD proposal was published by the European Commission in February 2022. The Commission's original proposal was subsequently followed by the EU Council publishing its negotiating position on the draft law in November 2022, and the EU Parliament then voting to adopt an amended draft in June 2023. Since then, the three EU legislating institutions have participated in 'trilogue' negotiations to agree a final text.

CSDDD follows various recently enacted human rights due diligence legislation, including the German Supply Chains Act, French Duty of Vigilance Law and Norwegian Transparency Act, and a number of human rights and sustainability-related reporting laws including modern slavery legislation in the UK, Canada and Australia, as well as the EU Corporate Sustainability Reporting Directive (CSRD).

Key elements

Feature	CSDDD
Extra-territorial application	Since its inception, EU legislators have anticipated that CSDDD would apply to both EU and non-EU companies. This has been retained following the trilogue negotiations. Two types of EU incorporated companies will be covered: those with more than 500 employees and a net annual turnover in excess of €150 million; and those with more than 250 employees and a net annual turnover in excess of €40 million, where at least half of that turnover is generated from certain sectors.¹ CSDDD will also apply to non-EU companies, although different turnover thresholds and phase-in periods may apply to non-EU companies. The EU bodies' press statements have not elaborated on these details, which will be set out in the text of the Directive once published.
Obligations	CSDDD will require within scope companies to undertake risk-based human rights and environmental due diligence to identify and assess actual and potential adverse impacts, and (as appropriate) prevent, mitigate, bring an end to and remedy such impacts in their own operations and value chains. For these purposes, the definition of "value chain" will include "upstream" activities such as production and supply, as well as certain "downstream" activities such as distribution and recycling. The previous drafts of CSDDD published by the Commission, Council and Parliament anticipated that companies would need to implement due diligence policies, supported by "appropriate measures" to: (a) identify actual or potential impacts; and (b) then, address such impacts, including for example through developing and implementing preventative action plans / corrective action plans; provision of compensation for those impacted; necessary investments in management, infrastructure and production processes; obtaining contractual assurances from business partners; and targeted and proportionate support for small and medium enterprises (SMEs). A more detailed analysis of CSDDD's proposed requirements, set out in the Commission's original draft, is available here. While a final text of CSDDD has yet to be published, we expect these core due diligence requirements to be retained, subject to any specific refinements around the scope and content of the measures that companies will be required to implement. Companies will be obliged by CSDDD to not only identify their own adverse human rights and environmental impacts, but also those of their business partners. If an in-scope company becomes aware of such an impact which cannot be adequately prevented or ended, it must end the affected business relationship. Companies will also have to carry out meaningful engagement with affected stakeholders, establish and maintain a notification mechanism and complaints procedure, periodically monitor the effectiveness of the measures taken, and publicly communicate on their due diligence practices. CSDDD will also require certain companies to adopt climate change transition plans in accordance with the Paris agreement.
Definitions – human rights impacts	For the purposes of CSDDD, an adverse human rights impact is defined with reference to the various rights and prohibitions set out in international human rights instruments, including the International Covenant on Civil and Political Rights, the International Covenant on Economic, Social and Cultural Rights, the Convention on the Rights of the Child and the eight core conventions of the International Labour Organisation.
Definitions – environmental impacts	CSDDD will consider an environmental impact as an adverse impact on the environment resulting from the breach of the prohibitions and obligations listed in various international environmental conventions, taking into account national legislation linked to the provisions of the instruments listed.
Accompanying measures	The provisional agreement also provides for EU Member States to create websites, platforms and portals that will provide information and support to companies, their business partners and stakeholders.
Exemption for finance sector	Apart from certain climate change-focused obligations, CSDDD's due diligence duties will not initially apply to the financial sector, although this will be reviewed in the future based on an impact assessment.
Regulatory enforcement	CSDDD will require Member States to designate supervisory authorities to monitor compliance with their obligations. Supervisory authorities will have the power to conduct investigations, and in the case of non-compliance, impose penalties such as "naming and shaming" and fines based on up to 5% of the company's net worldwide turnover. In deciding whether to impose penalties, account will be taken of the company's due diligence and remedial practices.
Civil remedy	CSDDD will also provide for claimants to seek civil remedies against companies based on alleged violations of their human rights. The Directive will also allow for a five year period for such claims to be brought, and set out procedural provisions relating to disclosure of evidence, injunctive measures, and costs for claimants.

Next steps

The Directive was originally initiated to address concerns about the lack of a "level playing field" for companies in relation to their human rights obligations.

The agreement reached between the Parliament and the Council concluded the trilogue phase. The next step is for the agreement to be worked into the legal text of the Directive, which takes place at a technical level. Thereafter the text must receive formal approval from the EU Parliament and its Legal Affairs Committee, as well as from the EU Council, after which it can enter into force.

CSDDD will apply to EU companies and parent companies two years after the date on which it comes into force, and non-EU companies three years after the date on which it comes into force. The EU press statements do not specify when CSDDD will apply to EU companies operating in high-risk sectors and non-EU companies operating in high-risk sectors, although it was the European Commission's proposal that these groups will be within scope four years after CSDDD enters into force.

We expect the text of the Directive to be available in early 2024, at which time we will follow up with another briefing.

With thanks to Rebecca Bell (trainee solicitor) for her contributions.

Footnote

1. Including: (a) manufacture and wholesale trade of textiles, clothing and footwear; (b) agriculture including forestry and fisheries, manufacture of food and trade of raw agricultural materials; (c) extraction and wholesale trade of mineral resources or manufacture of related products; and (d) construction.

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