Mandatory Due Diligence: Threat or Opportunity?

On Friday the 15th of March 2024 the much-discussed corporate sustainability due diligence directive (CSDDD) was adopted by the EU council. Last month many worried that no agreement would be reached, but the adjustments made to the final draft proved sufficient to convince the three opposing Member States, Italy, Germany and France. On Tuesday the 19th, the European Parliament's Legal Affairs Committee approved the CSDDD as well. In this blog, we will discuss these adjustments. What compromises have made the critical member states change their mind? Furthermore, considering the directive is still up for voting procedures in the European Parliament (EP), how do members of European Parliament perceive the adjustments? 

One of the most significant alterations pertains to the scope of the directive. As previously discussed in part 10, the directive originally aimed to encompass companies with 500 employees or more and a minimum turnover of €150 million, the final version now applies exclusively to companies with a minimum of 1,000 employees and an annual turnover exceeding €450 million. Another significant cut in the scope of the directive is the removal of what's called the high-risk sector approach. That strategy would have broadened the scope to encompass companies operating in industries prone to human rights or environmental conflicts, such as clothing industry or agriculture, even if they don't meet the employee or turnover criteria.

Furthermore, the new text restricts the scope by redefining the chain of activities, that is the activities which are considered a company’s responsibility under the CSDDD. This chain of activities encompasses upstream business partners and direct downstream partners - downstream partners who work for or on behalf of the company. However, it no longer includes indirect downstream business relations. This exclusion covers the disposal of the product, subcontractors, or distributors trading for their own account. Another alteration is the removal of the obligation for companies to provide a financial incentive for directors to implement climate transition plans. Finally, the new text regulates less strictly the way in which civil liability must be regulated under the directive. Consequently, member states have greater flexibility in dealing with this liability.

As a result of these adjustments, approximately 70 percent of the companies covered by the previous version of the directive will no longer fall under its scope. Consequently, it is estimated that the directive will now apply to only 0.05% of European companies. This has naturally received criticism, particularly from environmental and human rights advocates. For example, the European Coalition for Corporate Justice stated that the approval of the CSDDD "brings us 0.05% closer to corporate justice". The World Wide Fund for Nature wrote in a statement that the adjustments to the directive are "Breaking the earlier agreement made with the European Parliament". 

This critique points out an interesting aspect. Especially considering that the original text was already a compromise between the European Council and the European Parliament and the fact that the EP previously proposed a threshold of 250 employees and an annual turnover of €40 million. This begs the question whether the EP will approve of an adjustment which heightened the original turnover threshold tenfold. The EP is to vote on the directive next month, presumably the 24th of April 2024.

While the final version of the CSDDD may not satisfy all, its adoption would represent a significant step forward in holding corporations accountable for their social and environmental impacts. As businesses navigate the evolving landscape of sustainability regulation, adherence to the principles outlined in the CSDDD will be essential for fostering a more responsible and ethical corporate culture within the EU and beyond.