Supply Chain Compliance: Update on the EU Corporate Sustainability Due Diligence Directive

Early this year in February, the European Commission proposed its new Corporate Sustainability Due Diligence Directive (CSDDD) that would introduce significant and widespread corporate due diligence obligations with respect to human rights and international environmental standards – not only being imposed on EU but also on non-EU companies (see our previous blog post here). This new legislative proposal sets out, for the first time, a mandatory framework for companies registered or operating within the EU to carry out due diligence along their supply chains and to identify, prevent or stop adverse impacts related to human rights and the environment. The proposal builds on many national proposals (such as the French Duty of Vigilance Law or the German Supply Chain Duty of Care Act, see our previous blog post here) that have already been enacted by Member States.

Since its publication, the proposed CSDDD has attracted a lot of attention and been strongly debated within the Council and various committees of the European Parliament. EU Member States have been very quick to start deliberations on the file, with the aim to reach a Council negotiating position – referred to as a ‘General Approach’ (GA) – at a meeting on 1 December 2022. In contrast, the European Parliament took much longer to begin substantial discussions on the CSDDD proposal, which is why the earliest moment when the final so-called “trilogue negotiations” between the European Parliament, the Council and the Commission could be expected would be in May 2023.

Below we have set out the key points coming out of the recent process, and what to except on this important piece of legislation in the course of 2023.

What are the key changes agreed in the Council?

Considering the far-reaching implications of the proposed CSDDD, negotiations among Member States have been very extensive. Positions on key aspects of the proposal have frequently changed, especially regarding the exact scope of the directive (in particular, whether the legislation only applies to upstream value chains (or also the downstream use of products and services), and the employee and revenue thresholds for a company to fall in-scope).

These negotiations have resulted in a large number of changes to the original Commission proposal:

Scope 

The Council’s approach significantly narrows the scope of the CSDDD. Whereas the Commission proposed that the directive would apply to the entire value chain, Member States opted to introduce the concept of ‘chain of activities’ which is more closely aligned with the concept of supply chains. It covers a company’s upstream business partners and very narrowly its downstream business partners, without covering the use of a company’s products or the provision of services.

The Council’s approach also fully abandons the concept of ‘established business relationship’, which was newly introduced by the Commission as a substitute for the term supplier and was inconsistent with soft law standards in this regard. Instead, the proposal now is relying solely on the concept of ‘business partner’, which includes legal entities with whom the company has a commercial agreement or to whom it provides certain services (‘direct business partner’), or entities that perform business operations related to the company (‘indirect business partner’). Yet, the new concept still is likely to be broader than recent national supply chain laws in that it includes different tiers of indirect business partners and obviously not only suppliers to the product in a narrow sense.

Regarding the thresholds related to company employees and turnover, the Council has largely maintained the Commission’s proposal. However, the Council’s approach introduced a phase-in period, based on the size of a company. There would now be a one-year gap between the transposition deadline for the directive (2 years after entry into force) and the start of application. From three years after entry into force, the CSDDD would apply to EU companies with over 1000 employees and net worldwide turnover of more than €300mn in the preceding year and to non-EU companies with over €300mn net turnover in the EU in the preceding year. From four years after entry into force it would apply to EU and non-EU group 1 companies (with over 500 employees and at least €150mn net turnover worldwide), and from five years after entry into force to EU and non-EU group 2 companies (limited liability companies that do not meet both group 1 thresholds and operate in listed high impact sectors, having more than 250 employees and €40mn net turnover worldwide). Such high impact sectors include the manufacture and wholesale trade of textiles, leather and related products (including footwear); agriculture, forestry, fisheries (including aquaculture), the manufacture of food products and beverages; the extraction of mineral resources, and the manufacture of basic metal products.

Interestingly, although the CSDDD is not a sector-specific piece of legislation, the Council has significantly reduced its potential to apply to regulated financial undertakings. Whether the obligations apply to business partners to which regulated financial undertakings provide financial services is left to Member States as many other aspects in respect to the financial sector.               

Directors’ duties

In the agreed GA, Member States have entirely removed all provisions related to directors’ duty of care as it was seen as too much of interference with domestic corporate laws and their standards of care. This includes previous provisions on directors’ remuneration linked to sustainability goals.

Climate Change Plan

The Council maintains Art. 15 on climate change, which obliges companies to adopt a plan, including implementing actions and related financial and investments plans, to ensure that the business model and strategy of the company are compatible with the Paris Agreement, including if necessary, a company’s greenhouse gas emission reduction objectives.

Civil liability

The Council sets out clearly the elements for liability and made explicit that liability requires fault (negligence or intent) and hence, excludes forms of strict liability. Any person that has suffered damages would be entitled to full compensation in accordance with applicable national law. However, liability is ruled out when the damage was only caused by a company’s business partner.

The Council maintained the key provision on (indirectly) adapting international private law standards on conflict of norms: Member States must ensure that national laws transposing the civil liability regime provided for in CSDDD are of overriding mandatory application in cases where the law applicable to claims is in most cases not the law of a Member State but the law of a third country where the damage occurred.  

How far along is the European Parliament?

The work in the parliamentary committees has been significantly delayed when compared to the Council. MEP Lara Wolters presented her draft report in the JURI committee on 17 November 2022. The draft report attempts to significantly enhance the proposed due diligence framework. Members of the committee had until 30 November to submit their proposals for amendments. In the coming months, MEPs in JURI, as well as in the other eight associated committees will negotiate their respective list of final amendments, trying to reach a final European Parliament report by May 2023.  

What to expect next?

The Council was very quick in adopting its General Approach on the CSDDD. However, it was a difficult balancing act by the Czech Presidency, and, due to the lack of consensus, the 27 ministers ultimately had to vote on the draft. It remains to be seen how this will impact the position of the Council once trilogue negotiations start.

The European Parliament is still at least five months away from adopting its position, which would allow the trilogue process to start. Based on the draft JURI report it could be expected that the Council and the European Parliament could find common ground on several issues. However, it is already evident that significant differences of opinion exist on the appropriate scope of the CSDDD.

If trilogues begin by mid-2023, this would still allow sufficient time to agree on a final text and adopt the CSDDD before the end of the current legislative mandate in early 2024. However, considering the sensitivity of the proposal, its significant regulatory implications for companies in the EU and around the world, and the significant differences in the positions of the three EU institutions that are already taken shape, it is difficult to predict if progress can be made on that time frame to adopt the CSDDD.