Understanding the EU Council and European Parliament’s provisional agreement on Corporate Sustainability Due Diligence Directive

Post Date
16 January 2024
Author
Jamie Macfarlane
Author
Laurien Callens
Read Time
3 minutes
  • ESG advisory

In December 2023, the EU Council and European Parliament reached a provisional deal on the EU Corporate Sustainability Due Diligence Directive (CSDDD).

This Directive establishes obligations requiring businesses to identify, prevent or at least mitigate and finally terminate adverse impacts on human rights (such as forced labour, and inadequate workplace health and safety) and the environment (greenhouse gas emissions, biodiversity loss, waste disposal), concerning their own operations, those of their subsidiaries, and those carried out by their business partners.

Within the provisional agreement, the legislators established the scope of the Directive, the inclusion of transition plan elements, liabilities for non-compliant companies, the list of rights and prohibitions that companies should respect, and the requirements for the financial sector.

The scope

CSDDD will apply to companies meeting one of the following criteria:

  • EU companies with more than 500 employees and a global turnover of €150 million+
  • Non-EU companies with a turnover of €150 million+ generated in the EU market (the Commission will publish a list of non-EU companies that fall under the scope of the Directive)
  • EU companies with more than 250 employees and a global turnover of €40 million+, with 50% generated in a high-risk sector
  • Non-EU companies with a turnover of €40 million+ generated in the EU market, with 50% generated in a high-risk sector*

(*Here ‘high risk’ is defined as textiles, leather, clothing, footwear and related products; agriculture, forestry, fisheries and food products; and mineral resources, metal products and chemicals.)

Throughout the negotiations between the Council and the Parliament, the inclusion (or exclusion) of the financial sector was the subject of much discussion with many opposing opinions voiced. As it stands, the sector will temporarily be excluded from the scope of the Directive, however, a review clause will be included for possible future inclusion based on a sufficient impact assessment. 

Climate change

Large in-scope companies willbe expected to adopt and publish a climate transition plan with time-bound emissions reduction targets for climate change mitigation, to ensure that strategies and business models are aligned with the Paris 1.5 °C temperature goal (agreed in 2015 at COP21).

Civil liability and penalties

The CSDDD includes mechanisms for civil enforcement, with the recent agreement reinforcing the ability of affected parties, including individuals, trade unions and civil societies, to access justice. Adversely affected parties will have a five-year period in which they can initiate claims against a company. Additionally, claimants will also benefit from reduced requirements regarding disclosure of evidence, injunctive measures, and the cost of proceedings.

The possibility of financial sanctions from supervisory authorities in each EU Member State is also included in the Directive. Non-compliance with the CSDDD will carry substantial financial and criminal consequences for damages resulting from human rights or environmental issues. Sanctions imposed can include fines amounting to at least 5% of the net worldwide turnover.

Reporting

The CSDDD will work in tandem with the Corporate Sustainability Reporting Directive (CSRD), effective for some companies from 2025 (based on FY 2024 data). Companies in scope of CSRD will need to follow the reporting obligations set out by this Directive to communicate relevant information on its due diligence policies and processes. Companies that are not in the scope of CSRD should publish an annual statement on their website.

Next steps

The next step in the process is for this provisional agreement to be endorsed and formally adopted by both institutions before it can enter into force. After the adoption, the Directive will need to be incorporated into Member States’ national legislation.

If you would like to better understand the requirements of the CSDDD as they apply to your company, do reach out to us. 

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