EU Council Approves Revised Corporate Sustainability Due Diligence Directive after Compromise

On 15 March 2024, the Council of the Union approved a compromise text of the corporate Sustainability Due Diligence Directive (CSDDD or CS3D). Pending approval by the European Parliament and sign off by the European Commission, the text will now progress to formal adoption. 

The final text endorsed by the Council is a reflection of the extensive negotiations that impeded the approval process and culminated in several significant compromises to initial proposals. Most notably, the thresholds determining whether companies will be subject to CSDDD have been altered. Further, fewer activities will be covered and a more gradual phasing-in of obligations was introduced.

Nevertheless, while your company may no longer be directly caught by the Directive, your supply chain partners may remain within its scope. As a result, the implementation of appropriate policies and due diligence systems remains important.

Background

In February 2022, the European Commission introduced the CSDDD, which aims “to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance.”

After almost two years of negotiations, a provisional political agreement was announced between the Council of the EU and the European Parliament in December 2023. However, the Council’s subsequent failure to endorse the text raised significant questions over CSDDD’s future. Ultimately though, the compromise text was endorsed on March 15, 2024, and it is now expected to be set for adoption by the European Parliament on April 24, 2024.

Key Changes

The proposed revisions entail significant alterations to the scope of companies caught by the CSDDD:

• The threshold for EU companies has been raised from those with more than 500 employees and EUR 150 million turnover to those with more than 1,000 employees and a net worldwide turnover exceeding EUR 450 million. Based on estimates, the revised thresholds will result in approximately 5,500 companies falling within the scope. This represents a reduction of nearly 70% compared to the previous political compromise reached in December.
• Only non-EU companies generating a net turnover of more than EUR 450 million in the EU or meeting specific franchising and licensing criteria are within scope. Thresholds applicable to franchises have also been increased. 
• New exemptions apply for non-operational ultimate parent companies and those failing to meet applicable criteria for the last two financial years.
• The revised CSDDD removes the high-risk sectors approach. However, a review provision remains, allowing for its potential reconsideration at a later point if deemed necessary.
• Climate transition plans continue to be obligatory (including in the financial sector), but large companies are no longer compelled to endorse these plans actively, such as through financial incentives. To avoid duplication, companies already subject to the Corporate Sustainability Reporting Directive (CSRD) remain exempt from this obligation.
• Another significant change concerns the narrowing of the due diligence requirement to a “chain of activity” rather than a value chain. The original proposal extended to activities across the value chain which included both upstream activities such as design and extraction, and downstream activities like distribution and storage. The provisional agreement introduced the “chain of activity” concept, covering only specifically listed parts of the value chain. The definition has been further narrowed to exclude indirect business partners, including financial services and providers from obligations under CSDDD concerning downstream activities as well as downstream activities at the product disposal stage (for example, recycling, dismantling, and landfilling). 
• The provision on civil liability has been further adjusted, granting Member States greater flexibility. Specifically, Member States can establish ‘reasonable conditions’ for injured parties to authorize NGOs or other organizations to enforce their rights through legal actions.

Which companies are caught, and when?

Subject to certain exemptions, the final text therefore applies to companies which meet one of the following criteria:

• EU companies with more than 1000 employees and a net worldwide turnover exceeding EUR 450 million.
• Non-EU companies with a turnover exceeding EUR 450 million within the EU market.
• Franchises with a net worldwide turnover of EUR 80 million and EUR 22.5 million in royalties.

The following staged approach has been introduced for EU and Non-EU companies:

• Group 1 – a 3-year application period for companies with more than 5000 employees and EUR 1500 million turnover;
• Group 2 – a 4-year application period for companies with more than 3000 employees and EUR 900 million turnover; and
• Group 3 – a 5-year application period for companies with more than 1000 employees and EUR 450 million turnover.

For EU companies, turnover refers to net worldwide turnover, and for non-EU companies, turnover refers to turnover in the EU. 

Franchises will have five years to comply.

Companies that are not already subject to the CSRD will be required to disclose information about their due diligence process, as well as potential and actual adverse impacts identified. Additionally, they must outline the appropriate measures and actions taken. These reporting requirements apply to financial years beginning on or after the following dates:

• Group 1 companies (above): Starting from 1 January 2028.
• Group 2 and 3 companies (above), as well as franchises: Starting from 1 January 2029.

This information will have to be published on companies’ websites in the form of an annual statement.

Expanded Due Diligence Obligations

Whilst the revised text underscores the complexities inherent in pushing forward legislation that promotes sustainable business practices, the proposed changes aim to balance regulatory requirements with practical considerations for affected entities. 

The revised CSDDD expands due diligence obligations, aligning closely with OECD Guidelines for Responsible Business Conduct. Key enhancements include new or expanded provisions and obligations concerning risk mapping, prioritization, remediation, stakeholder engagement and termination as a last resort. 

Next Steps and Implications

CSDDD aims to harmonize due diligence laws across EU member states, complementing existing national laws, EU-wide sector- and issue-specific efforts and global initiatives to enhance corporate sustainability governance such as the OECD Guidelines for Multinational Enterprises.

The evolution of the CSDDD reflects ongoing efforts to enhance corporate accountability and sustainability practices, and the inherent challenges involved in this. If formally adopted by the European Parliament on 24 April, the CSDDD will proceed towards becoming law. As regulatory frameworks continue to evolve, businesses must stay informed and adapt their practices accordingly to meet both emerging obligations and stakeholder expectations. 

In the UK Baroness Young of Hornsey introduced the Commercial Organisations and Public Authorities Duty (Human Rights and Environment Bill) on 28 November 2023.  That has not become law but, if it did, it would introduce mandatory human rights and environmental due diligence into UK law.  As such, the direction of travel in the UK seems clear even if the timings are not.

Written by Annalise Slocock

After weeks of uncertainty, new EU rules on sustainable supply chains seem likely to pass into law.

https://www.euronews.com/my-europe/2024/03/15/governments-support-stripped-down-corporate-due-diligence-law