EU Council reaches compromise on CSDDD

After lengthy consideration and many discussions, the Council of the EU has now finalised its position on the Commission's draft of the Corporate Sustainability Due Diligence Directive (CSDDD, summarised here). 

The Council's text (see here and here), which will form the basis of its negotiating position with the European Parliament when the trilogues begin next year, makes a number of changes to the Commission's draft. 

We set out some of the key changes below:

• Scope: The scope of the regime itself remains largely the same (subject to the below), except the criteria must now be met for two consecutive financial years and there has been a slight tweak to the turnover required for those operating in one of the high-risk sectors (the definition of which has been supplemented with an annex containing relevant NACE codes). Other changes and clarifications include the Council indicating that the scoping criteria should be assessed at individual company level (not consolidated) and introducing new provisions to allow some of the obligations to be met at group level.
• Established business relationships: This concept has been removed from the regime, which now only refers to business partners. The regime balances this deletion (which is more in line with the existing international standards) by seeking to move towards a more explicit risk-based approach to implementing the due diligence obligations, with new provisions on risk mapping and prioritisation.
• Value chain vs chain of activities: The Commission's references to "value chain" have been replaced by the new term "chain of activities". This is a more traditional supply chain-oriented definition, limiting the extent of the due diligence obligation by excluding from scope the downstream use phase of a company's products or provision of services.
• Financial undertakings: The Council has decided to leave it to individual Member States whether they wish the regime to regulate the provision of financial services by financial undertakings. The text clarifies what is meant by financial services, limiting the "chain of activities" in a financial undertaking context to direct lending and insurance/reinsurance. The text specifically excludes AIFs and UCITS and investment activities "because of their specificities" as well as excluding SMEs (that are not part of large groups). Some of the other allowances for financial undertakings remain, including that the identification of impacts should only be undertaken before providing the financial service and there should be no requirement to temporarily suspend or terminate relationships. 
• Climate change and directors' duties: The obligation for a transition plan remains, but the text has been aligned more closely with the Corporate Sustainability Reporting Directive (CSRD). However, the provision concerning variable remuneration has been dropped, along with the provisions relating to directors' duties. 
• Civil liability: The civil liability provisions have been significantly amended to provide more clarity. Companies can be liable for intentional or negligent failures to comply with the obligations to prevent or bring adverse impacts to an end, where such failures lead to damage. Liability is no longer limited where companies have sought to introduce contractual assurances from business partners, but the clarifications also make clear companies cannot be liable for harms caused only by their business partners. 
• Timing: The Council has suggested a phased-in approach to implementation. Very large companies (EU (>1000 employees and >EUR300m net worldwide turnover) and non-EU (>EUR300m net turnover in the Union)) would be required to comply from three years after the entry into force of the Directive (with a two-year transposition period for Member States). Large EU and non-EU companies meeting the scoping criteria would then be required to comply after four years and high-risk EU and non-EU companies after five years.

The Council has made further changes but otherwise the substantive diligence obligations remain broadly the same as previously proposed. 

The text provides more clarity in places than the Commission draft and it has clearly tried to address the areas of concern raised. Despite this, some of the changes are likely to be controversial. 

The European Parliament still needs to finalise its own position before it is ready to negotiate with the Council and is not expected to be in that position until March/April 2023. 

The CSDDD still has some way to go before it becomes law and further (potentially significant) changes should be expected before the regime is finalised.