14 December 2023
EU Council: Corporate sustainability due diligence: Council and Parliament strike deal to protect environment and human rights
The Council and the European Parliament today reached a provisional deal on the corporate sustainability due diligence directive (CSDDD), which aims to enhance the protection of the environment and human rights in the EU and globally. The due diligence directive will set obligations for large companies regarding actual and potential adverse impacts on human rights and the environment, with respect to their own operations, those of their subsidiaries, and those carried out by their business partners.
Obligations for companies
The due diligence directive lays down rules on obligations for large companies regarding actual and potential adverse impacts on the environment and human rights for their business chain of activities which covers the upstream business partners of the company and partially the downstream activities, such as distribution or recycling.
The directive also lays down rules on penalties and civil liability for infringing those obligations; it requires companies to adopt a plan ensuring that their business model and strategy are compatible with the Paris agreement on climate change.
Main elements of the agreement
The provisional agreement reached today between the two co-legislators frames the scope of the directive, clarifies the liabilities for non-compliant companies, better defines the different penalties, and completes the list of rights and prohibitions that companies should respect.
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 €150 million. For non-EU companies it will apply if they have a €300 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, the financial sector will be temporarily excluded from the scope of the directive, but there will be a review clause for a possible future inclusion of this sector based on a sufficient impact assessment.
Climate change and civil liability
The compromise struck today strengthens the provisions related to the obligation of means for large companies to adopt and put into effect a transition plan for climate change mitigation.
On civil liability, the agreement reinforces the access to justice of persons affected. It establishes a period of five years to bring claims by those concerned by adverse impacts (including trade unions or civil society organisations). It also limits the disclosure of evidence, injunctive measures, and cost of the proceedings for claimants.
As a last resort, companies that identify adverse impacts on environment or human rights by some of their business partners will have to end those business relationships when these impacts cannot be prevented or ended.
Penalties
For companies that fail to pay fines imposed on them in the event of violation of the directive, the provisional agreement includes several injunction measures, and takes into consideration the turnover of the company to impose pecuniary penalties (i.e. a minimum maximum of 5% of the company’s net turnover). The deal includes the obligation for companies to carry out meaningful engagement including a dialogue and consultation with affected stakeholders, as one of the measures of the due diligence process.
Public procurement
The deal establishes that compliance with the CSDDD could be qualified as a criterion for the award of public contracts and concessions.
Definitions
The provisional agreement clarifies the obligations for companies described in Annex I, a list of specific rights and prohibitions which constitutes an adverse human rights impact when they are abused or violated. The list makes references to international instruments that have been ratified by all member states and that set sufficiently clear standards that can be observed by companies.
The compromise adds new elements to the obligations and instruments listed in the Annex as regards human rights, particularly for vulnerable groups and core International Labour Organisation (ILO) Conventions, which can be added to the list, by delegated acts, once they have been ratified by all member states.
The provisional agreement also introduces in the annex references to other UN conventions the International covenant on civil and political rights or the International covenant on economic, social and cultural rights, or the Convention on the rights of the child. Likewise, the compromise clarifies the nature of environmental impacts covered by this directive as 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.
Next steps
The provisional agreement reached with the European Parliament now needs to be endorsed and formally adopted by both institutions.
Background
On 23 February 2022, the Commission submitted to the European Parliament and to the Council a proposal for a directive on corporate sustainability due diligence. The Council adopted its general approach on 1 December 2022.
Corporate sustainability (background information)
EU Parliament: Corporate due diligence rules agreed to safeguard human rights and environment
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Applies to EU and non-EU companies with a turnover over 150 million euro and smaller companies in sectors such as manufacture of textiles, agriculture, mineral resources and construction
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A civil liability regime for damages
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Penalties include naming and shaming and fines of up to no less than 5% of net worldwide turnover
Parliament and Council negotiators agreed on new rules obliging firms to integrate their human rights and environmental impact into their management systems.
The new directive on corporate sustainability due diligence, informally agreed by EU co-legislators on Thursday, sets obligations for companies to mitigate their negative impact on human rights and the environment such as child labour, slavery, labour exploitation, pollution, deforestation, excessive water consumption or damage to ecosystems .
They will have to integrate so called “due diligence” into their policies and risk-management systems, including descriptions of their approach, processes and code of conduct. Firms will also have to adopt a plan ensuring their business model complies with limiting global warming to 1.5°C. MEPs ensured that the management of companies with over 1000 employees will receive financial benefits for implementing the plan.
Rules applicable to big companies and those in high-risk sectors
The legislation will apply to EU companies and parent companies over 500 employees and a worldwide turnover higher than 150 million euro. The obligations will also apply to 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 following sectors: 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. It will also apply to non-EU companies and parent companies with equivalent turnover in the EU.
Companies will have to identify, assess, prevent, mitigate, bring to an end to and remedy the negative impact of their activities and on people and the planet. To do so, they will be required to make investments, seek contractual assurances from the partners, improve their business plan or provide support to their partners from small and medium-sized enterprises.
Information portal for companies
MEPs ensured that firms will also have to meaningfully engage with those affected by their actions, introduce a complaints mechanism, communicate on their due diligence policies and regularly monitor its effectiveness. MEPs also ensured that EU governments will be required to create practical portals, dedicated to companies’ due diligence obligations, that will provide information on content and criteria, related Commission guidance and information for stakeholders.
Sanctions and supervision
Each EU country will designate a supervisory authority to monitor whether firms are complying with these obligations. These bodies will exchange best practices and cooperate at EU level within the European Network of Supervisory Authorities established by the Commission. They will be able to launch inspections and investigations and impose penalties on non-compliant companies, including “naming and shaming” and fines of up to 5% of their net worldwide turnover.
MEPs negotiated that companies will be liable for breaching their due diligence obligations and their victims will have the right to be compensated for damages. To motivate companies, MEPs finally ensured that compliance with due diligence obligations can be used as part of the award criteria for public and concession contracts.
Quote
Lead MEP Lara Wolters (S&D, NL) said after the end of negotiations:
„This law is a historic breakthrough. Companies are now responsible for potential abuses in their value chain, 10 years after the Rana Plaza tragedy. Let this deal be a tribute to the victims of that disaster, and a starting point for shaping the economy of the future – one that puts the well-being of people and the planet before profits and short-termism. I am very grateful to those who joined me in the fight for this law. It ensures honest businesses do not have to participate in the race against cowboy companies,”
Next steps
The agreed draft law requires formal approval by the Legal Affairs Committee and the European Parliament as a whole, as well as by the Council (EU governments) before it can enter into force.
Background
Parliament has consistently called for more corporate accountability and mandatory due diligence legislation. The Commission proposal was introduced on 23 February 2022. It complements other existing and upcoming legislative acts, such as the deforestation regulation, conflict minerals regulation and draft regulation prohibiting products made with forced labour.