Corporate Sustainability Due Diligence Directive: Political agreement reached

Nearly two years after the European Commission (“Commission”) first published its legislative proposal for an EU framework on human rights and environmental due diligence, a provisional agreement between the European Parliament and Council has been reached. Following complex negotiations between the three EU institutions since June, the deal paves the way for the passing of the Corporate Sustainability Due Diligence Directive ("CS3D"). Before coming into law, further technical work will be needed to finalise the text of the CS3D, which must then be approved by the relevant Parliamentary committees, the Plenary of the Parliament and the Council. This blog is based on the limited information available from the Council and Parliament press releases.^[1]

What will the CS3D mean for companies?

The CS3D will mandate a new regime for in-scope EU and non-EU companies^[2], requiring them to identify, assess, prevent, mitigate, bring to an end and remedy adverse human rights and environmental impacts concerning their own operations, those of their subsidiaries and their business partners. They must develop systems of due diligence and integrate these into their internal policies, taking account of their upstream and, to a limited extent, downstream partners, including production, supply, transport and storage, design and distribution. If a company identifies an adverse impact by a business partner, it will need to terminate the relationship if the impact cannot be prevented or ended. The CS3D also mandates transition plans. 

Scope of application

The CS3D will apply to EU companies that have more than 500 employees and a net worldwide turnover over €150 million (described as larger companies). Those with over 250 employees and a net worldwide turnover of more than €40 million will also be in scope if at least €20 million of that turnover is generated in high-risk sectors, namely: the manufacture and wholesale trade of textiles, clothing and footwear, agriculture (including forestry and fisheries), manufacture of food and trade of raw agricultural materials, extraction and wholesale trade of mineral resources or manufacture of related products and construction. Non-EU companies with equivalent turnover generated in the EU will be in scope, beginning three years from the CS3D entering into force. The Council has indicated that the Commission will need to publish a list of these entities. 

Financial sector 

Financial undertakings are in scope in respect of their own operations and their upstream business relationships but temporarily excluded for the purposes of their downstream business, i.e. the provision of financial services. This exclusion of downstream activity is subject to a review clause following an impact assessment. 

Further clarity on protected human rights and environmental impacts

The CS3D will include a list of rights and prohibitions which, when abused or violated, amount to an adverse human rights impact. These will be drawn from international conventions which contain standards that are sufficiently clear for companies to observe. They will include the International covenant on civil and political rights, the International covenant on economic, social and cultural rights and the Convention on the rights of the child. It has also been agreed that the core International Labour Organisation Conventions will be included once they have been ratified by all member states.

The CS3D covers environmental as well as human rights impacts. These will include any measurable environmental degradation, such as harmful soil change, water or air pollution, harmful emissions or excessive water consumption or other impacts on natural resources.

Clarity on climate: transition plans 

Larger companies within scope of the CS3D, including financial firms, must adopt transition plans to ensure that their business model and strategy align with limiting global warming to 1.5°C. 

Consequences for non-compliance and civil liability

National supervisory authorities will be empowered to sanction companies that fail to comply with the CS3D, including "naming and shaming" non-compliant companies, imposing fines of up to 5% of net worldwide turnover and issuing injunctive measures. The domestic authorities will also have to cooperate with the European Network of Supervisory Authorities in launching inspections and investigations.

Meaningful corporate engagement with affected stakeholders will be required as part of due diligence processes. Individuals, trade unions and civil society organisations concerned by adverse impacts will have a period of five years to bring claims. The deal limits the disclosure of evidence, injunctive measures and the costs of proceedings for claimants.

Implementation is still some way off but there are steps businesses can take now

While the political compromise is an important milestone for the EU, there is still some time before in-scope companies must comply with the requirements of the CS3D. 

It is expected that a final text will be published, at the earliest, by Q3 2024 in the Official Journal of the European Union and enter into force 20 days after its publication. As a directive, the CS3D will then need to be transposed into national law, which is expected to be within a deadline of two years. 

In the meantime, while the detailed text of the CS3D is not yet available, its broad scope means that businesses will need to start thinking about mapping their human rights and environmental risks sooner rather than later. They will also want to put in place the governance, policies, and procedures to address the risks in line with the CS3D and their own corporate purposes. Even companies that are not likely to be directly obligated under the CS3D will need to take note, as they may be in the value chain of those that are, and so subject to their due diligence efforts. The CS3D is therefore likely to have widespread impact beyond the EU.

^[1]Corporate due diligence rules agreed to safeguard human rights and environment | News | European Parliament (europa.eu); Corporate sustainability due diligence: Council and Parliament strike deal to protect environment and human rights - Consilium (europa.eu)

^[2] EU companies are those formed in accordance with the legislation of a member state; non-EU companies are those formed in accordance with the legislation of a third country