EU Parliament and member states reach deal on corporate due diligence law

Negotiators of the EU Council and Parliament agreed on Thursday (14 December) after an all-night discussion a compromise deal on the Corporate Sustainability Due Diligence Directive (CSDDD), including on the most controversial aspects of the inclusion of finance and on the obligation to implement climate plans.

Proposed by the European Commission in February 2022 after pressure from the European Parliament, the CSDDD aims to hold big companies responsible for violations of human rights and environmental standards in their value chains.

“This law is a historic breakthrough. Companies are now responsible for potential abuses in their value chain, 10 years after the Rana Plaza tragedy,” said Lara Wolters, the member of the European Parliament who led the negotiations for the Parliament.

According to Richard Gardiner, EU policy head at the World Benchmarking Alliance (WBA), the CSDDD “gives companies a clear legal mandate that they must address the human rights and environmental harms across their upstream and downstream supply chains.”

Finance

While the Parliament pushed for an ambitious legislation that would also include financial actors like banks, the EU Council, representing the 27 member states, pushed for less ambition, especially under pressure from the French government.

The compromise agreement now excludes the core business of financial actors, namely their investment and lending activities, from the scope of the CSDDD, which is a concession from the Parliament to the Council.

Banks and co. will still have to do due diligence on their upstream activites but those are usually very limited. Also, a review clause should ensure that the question of the inclusion of finance will have to be looked at again in a few years’ time.

Climate Plans

EU Council and Parliament also fought over the role of climate plans that companies would have to draw up to bring their activities in line with the Paris agreement climate targets to limit global warming below 1.5 degrees Celsius.

While the Council wanted to limit the obligation to the formulation of plans, the Parliament also wanted the CSDDD to force companies to actually implement it.

As Euractiv understands, the agreement is that companies would have the duty to adopt and put into effect climate plans, which seems closer to the Parliament’s position.

In another win for the Parliament’s position, financial corporations will also be required to adopt and put into effect such climate plans. This could partially make up for the Parliament’s concession regarding the exclusion of finance from due diligence obligations in their core business.

Large businesses or risky sectors

The CSDDD will only apply to companies with more than 500 employees and a worldwide annual turnover of more than €150 million.

For some risk sectors (textiles, agriculture, food manufacturing, trade of mineral resources, construction), the threshold is lower: Companies with over 250 employees and with a turnover of more than 40 million euro if at least 20 million are generated in one of the sectors mentioned above will fall under the scope of the directive.

Importantly, the directive targets all companies active in the EU market, even if their headquarters is outside the EU, which has led to major lobbying from foreign companies that worried about the extraterritorial effect of the directive. Of course, extraterritorial effect is part of the intended purpose of the directive as it aims to increase compliance to human rights and environmental standards worldwide.

Enforcement

Once implemented, the CSDDD’s due diligence obligations will be enforceable in two ways.

First, victims can claim reparations from a company in a European court if they can show that a damage they suffered through a violation of human rights or environmental standards was caused by the companies failure to follow proper due diligence procedures.

Second, and maybe more effective, national supervisory bodies will be able to sanction companies if they find that the companies do not properly implement their due diligence procedures. The sanctions can go as high as 5% of a company’s global turnover, which can be especially painful for large global companies.

“It’s hard to imagine that any compliance officers will not take this extremely serious and this threat should help drive a high level of compliance,” the WBA’s Gardiner told Euractiv.

While the political deal has been struck, it will still have to be officially approved by the EU Council and the European Parliament before the directive is formally adopted. It will then have to be transposed into national legislation.

[Edited by Zoran Radosavljevic]

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