The Council of the European Union and the European Parliament have reached a provisional agreement on the Corporate Sustainability Due Diligence Directive (“CSDDD”).
The CSDDD will introduce due diligence obligations on companies from the EU and non-EU, and will also establish the basis for these companies to hold the liability for breaches of these obligations. The interim agreement results in a more limited scope of application of the CSDDD but with stricter provisions on civil liability and sanctions. This alert sets out the main elements of the interim agreement, to the extent known from the EU Council press release, about the Commission’s proposal. The due diligence directive will set obligations for large companies regarding actual and potential adverse impacts on human rights and the environment, concerning their operations, those of their subsidiaries, and those carried out by their business partners.
Business Obligations
The Due Diligence Directive sets out rules on the obligations of large companies about the actual and potential negative impacts on the environment and human rights. Their activities include the company’s upstream business partners and part of its downstream activities, such as distribution or recycling. The Directive also sets out provisions relating to sanctions and civil liability in case of breach of these obligations; it requires companies to adopt a plan that ensures their business models and strategies are consistent with the Paris Agreement on climate change.
Main elements of the agreement
The provisional agreement reached between the two co-legislators-
- Frames the scope of the directive
- Clarifies the liabilities for non-compliant companies
- Better defines the different penalties
- Completes the list of rights and prohibitions that companies should respect.
Climate change and civil liabilities
The compromise strengthens the provisions relating to the obligations on the means for large companies to implement the transition plans to mitigate climate change.
In matters of civil liability, the agreement enhances access to justice for those involved. It sets a five-year deadline for submitting compensation claims by those affected by negative impacts (including trade unions or civil society organizations). It also limits the disclosure of evidence, injunctive relief and litigation costs to claimants.
As a last resort, companies that perceive negative environmental or human rights impacts from some of their business partners will need to terminate those business relationships when these impacts cannot be prevented or ended.
Scope of the directive
The agreement fixes the scope of the directive on large companies that have more than 500 employees and a net worldwide turnover of over €150 million. For non-EU companies, it will apply if they have over €150 million net turnover generated in the EU, three years from the entry into force of the directive. The Commission will have to publish a list of non-EU companies that fall under the scope of the directive.
Financial Sector
According to the deal reached today, financial services will be temporarily excluded from the scope of the directive, but there will be a review clause for possible future inclusion of the financial downstream sector based on a sufficient impact assessment.
Penalties:
For companies that do not pay fines in case of violations of the directive, the provisional agreement includes some training measures and a review of the company’s turnover for the imposition of penalties (a minimum amount of 5% of the company’s net revenue). The agreement includes an obligation for companies to undertake meaningful engagement, including dialogue and consultation with stakeholders, as one of the measures of the due diligence process.
Provisional Agreement on corporate sustainability at a glance
| Features | Commission’s proposal | Provisional agreement |
| Covered entities | Adds a more detailed list in Annex I of specific rights and prohibitions that constitute adverse impacts when violated | EU companies: with 500+ employees and net worldwide turnover of EUR 150 ml Non-EU Companies: with net EU turnover of EUR 300 mlnthree-year delay in application Commission will publish a list of non-EU companies falling under the CSDDD. – Does not apply to the financial sector, which however may be added later under a review clause |
| Main obligations | Identification, prevention, mitigation and accounting of actual and potential adverse impacts resulting from violations of international human rights and environmental agreements. | Identification, prevention, mitigation, and accounting of actual and potential adverse impacts resulting from violations of international human rights and environmental agreements. |
| Civil liability | Member States must establish civil liability for failure to comply with the due diligence obligations when this results in adverse impacts leading to damage. | Establishes a limitation period of five years for those concerned by adverse impacts to bring claims |
| Penalties | Where fines are imposed by a Member State, they shall be based on the company’s turnover. | Where fines are imposed by a Member State, they shall be based on the company’s net turnover (e.g., minimum/maximum 5% of the company’s net turnover). Where imposed fines are not paid, injunction measures apply. |
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