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EU Corporate Sustainability Due Diligence Directive - Agreement and Text
A compromise has been found for the EU Corporate Sustainability Due Diligence Directive. It seems to have the support of the necessary majorities, although Germany continues to abstain. You can find the provisional draft on the internet page of the EU Parliament: Text of the provisional agreement. However, with the final resolution still pending, it’s still not certain that the Directive will be adopted.
The new EU Regulation banning the sale of goods produced using forced labour had just been adopted on 13 March 2024 (see our blog post, EU Regulation banning forced labour products is coming (and the EU Corporate Due Diligence Directive too?)), when the live ticker announced two days later: after much back and forth, sufficient EU Member States voted in favour of the (even more watered down) draft of the EU Corporate Sustainability Due Diligence Directive (Corporate Sustainability Reporting Directive, in short: CSDDD or CS3D).
On 14 December 2023, the chief negotiators from the Parliament and the Council announced that an – informal – agreement had been reached on the content of the EU CSDDD (see our blog post, EU Corporate Sustainability Due Diligence Directive on the home stretch). In Germany, the coalition government was unable to approve the text as the FDP vetoed the results of the trialogue negotiations. Accordingly, Germany abstained in the vote in the Council of the EU. As other Member States were hesitant, the necessary majorities were initially not achieved. Attempts by the Belgian Presidency of the Council to broker an agreement failed. However, following the agreement on the EU Regulation banning forced labour, a new compromise text paved the way for the necessary majorities on the EU CSDDD.
Despite the continued abstention from Germany, the compromise was confirmed at the Meeting of the Permanent Representatives on 15 March 2024. On 19 March 2024, the Committee on Legal Affairs in the European Parliament voted in favour of the modified CSDDD draft - 20 votes in favour and four against. You can find the press release of the European Parliament here. The issue is now on the agenda for the European Parliament meeting on 24 April 2024.
Final adoption will probably take some time, as the so-called corrigendum procedure will apply if the translations are not finalised in time. In this case, the European Parliament will have to vote again on the Directive after the European elections, followed by a final vote in the Council. The agreed text will need to be assessed in detail, subject to the final resolutions. The following cornerstones have been reported.
Personal and material scope
The EU CSDDD will now apply to companies from the EU and third countries and holding companies that have more than 1000 employees and a turnover of more than 450 million euro, as well as to companies that have entered a franchising agreement and have a turnover of more than 80 million euro, where royalties account for at least 22.5 million euro of this turnover. The lower thresholds for high-risk sectors have been deleted.
In addition, the compromise text foresees generous transition periods. The new obligations, which must still be transposed into national law, will have the following staggered application:
- For companies with more than 5,000 employees and 1.5 billion in turnover: three years after the entry into force
- For companies with more than 3,000 employees and 900 million in turnover: four years after the entry into force
- For companies with more than 1,000 employees and 450 million in turnover: five years after the entry into force.
A narrower definition of chain of activities now applies; it was adjusted to be consistent with the term supply chain in the German Act on Due Diligence for the Prevention of Human Rights Abuses in the Supply Chain (LkSG).
Transition plan
The draft also requires companies falling under the scope to adopt and implement a transition plan for bringing their business model into line with the upper limit of 1.5°c for global warming under the Paris Convention. However, the Directive no longer contains financial incentives to encourage companies to implement their plan and comply with their obligations not to exceed such thresholds.
Civil law liability and fines
According to the press release of the European Parliament, companies will still be liable, where they fail to comply with their duties of care and must fully compensate victims. In addition, companies must establish complaint mechanisms and cooperate with individuals and groups adversely affected by their actions. According to the Belgian Presidency, Member States will have greater flexibility when implementing these provisions.
The draft tasks supervisory authorities in each EU Member State with overseeing compliance with the due diligence obligations. Fines of up to 5% of the worldwide net turnover can be imposed on a company which fails to fulfil its obligations. Foreign companies must also name an authorised representative, who has their registered address within an EU Member State in which the company is active, and who can communicate with the relevant supervisory authority in the company’s name about compliance with the due diligence obligations.
Transposition into national law
As explained above, the EU CSDDD will need to be transposed into national law after its adoption at EU level. In Germany, appropriate amendments are expected to be made to the LkSG, which has applied since 1 January 2023. Since 1 January 2024, companies located in Germany with more than 1,000 domestic employees fall under the scope of this Act. German legislators are unlikely to exempt such companies from compliance with the Act until the (maximum) transitional periods for the EU CSDDD have expired. However, it will all become clear in the future.
Experts
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Dr Daniel Walden Rechtsanwalt Partner |
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Dr André Depping Rechtsanwalt, Mediator, M.L.E. Partner |
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