The provisional agreement on CSDDD – what does it include?

The Corporate Sustainability Due Diligence Directive (CSDDD) aims to introduce requirements for companies to identify and prevent, mitigate or bring to an end the actual and potential impacts of their activities on the environment and on human rights. Companies would have to conduct due diligence on their own operations and on the activities of their subsidiaries and other entities along their value chains. They would also have to create and implement so called prevention action plans, and acquire contractual assurance that commit the business partner to comply with the covered company’s code of conduct.  

Update on the negotiations 

On 14 December 2023 the European Parliament and EU member states reached a provisional agreement on the CSDDD. According to the legislative process, the provisional agreement then needs to be endorsed by the EU member states and then by the European Parliament.  

The EU member states have during the spring postponed the vote to endorse the CSDDD because of doubts that the proposal would not go through, mainly because of Germany’s late objections to what they see as a high burden of proof for companies, especially for SMEs, and the far-reaching liability under civil law for breached in duty of the supply chain.  

On 28 February 2024 the EU member states did not find the necessary support (qualified majority) to endorse the CSDDD proposal. The Council now has to consider the state of play and see if it is possible to address the concerns put forward by the member states in consultation with the European Parliament. This needs to be done in the next two weeks for the current European Parliament to be able to adopt it, otherwise it will be pushed to after the EU elections.   

The provisional agreement 

The below summary is based on information from the EU institutions, the final text will be published when the provisional agreement has been endorsed.  

Requirement to carry out due diligence  

The central part of CSDDD is that companies should carry out due diligence to identify, prevent, mitigate and account for their adverse human rights and environmental impacts. They should also have adequate governance, management systems and measures in place to do this. The requirements apply to a company’s activities, subsidiaries and business partners in the whole value chain. The downstream part of the value chain is limited to transport, storage, and waste.  

Scope 

Companies with more than 500 employees and with a global net turnover of 150 million euro. It also applies to companies with more than 250 employees and a global net turnover of 40 million euro where at least 20 million of the turnover have been generated in a “high risk sector” such as textiles, clothes and shoes, food, agriculture and agricultural commodities, fishing, forestry, minerals, and construction. Companies outside of the EU with a net turnover of 150 million euro generated in the EU are also in scope of the directive. Financial services will be temporarily excluded from the scope but there is a review clause for possible future inclusion.  

Definitions  

To clarify what human rights and environmental issues entail, the CSDDD lists a number of international conventions such as the International Covenant on Economic, Social and Cultural Rights, the convention on the Rights of the Child, and the International Covenant on Civil and Political Rights. Further conventions and standards may be added in delegated acts when the directive has entered into force.  

Adoption of a climate plan 

Companies should implement a climate plan that ensures that the business model is compatible with the goal of the Paris Agreement to limit global warming to 1,5°C.  

Enforcement and supervision 

Directors of companies in scope would be responsible for overseeing the due diligence requirements, and the proposed climate change requirements would be reflected in the director’s variable remuneration. Member states would hence amend their national regulations on directors’ duties to include the consideration of human rights, climate change and environmental consequences.   

Regarding civil liability, companies are liable for damages if they fail to comply with obligations to prevent, mitigate or bring to an end any potential adverse impacts.  
Each member state will according to the CSDDD appoint a national agency that will carry out inspections and issue sanctions if the rules are not adhered to. This could for example be a fine of up to 5% of the company’s global net turnover.  

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