EU: Political agreement reached on the CSDDD

Please note that, at the time of writing of this blog post, the revised wording of the CSDDD reflecting the political agreement is not yet available so the information in this post is based on the EU Parliament's and Council's press releases on 14 December. 

Last night, the EU Parliament and the Council reached a political agreement on one of the most important, but also most controversial pieces of EU ESG legislation. The Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) will impose far-reaching obligations for in-scope companies to carry out due diligence and mitigate actual and potential adverse impacts on human rights and the environment. For companies operating in the EU and their business partners, this is an extremely important turning point and they should prepare carefully for the entry into force of the new obligations.

What was agreed?

The final wording of the compromise text is not yet available, but according to the Council’s press release and the Parliament’s press release, the EU institutions reached the following agreement (for an overview of the key sticking points in the lead up to the final agreement, see our webinar):

Scope

The CSDDD will apply to EU companies that have more than 500 employees and a net worldwide turnover of €150 million, i.e. the Council prevailed with an approach that is more generous to companies. However, companies with more than 250 employees and a turnover of more than €40 million will also be covered if at least €20 million are generated in certain high-risk sectors, namely in the manufacture and wholesale trade of textiles, clothing and footwear, agriculture including forestry and fisheries, manufacture of food and trade of raw agricultural materials, extraction and wholesale trade of mineral resources or manufacture of related products and construction.

Non-EU companies will be covered if they have over €150 million net turnover generated in the EU, and will come into scope three years from the entry into force of the CSDDD. Notably, the Commission will have to publish a list of non-EU companies that fall under the scope of the Directive, which will provide some certainty to potentially affected companies.

In principle, the CSDDD will thus be limited to larger companies or parents of large groups that meet the same thresholds as set out above. However, as the Council pointed out, the new obligations will not only apply to their own operations and those of their subsidiaries, but will also cover operations carried out with their business partners. Accordingly, smaller companies will also be affected.

For the time being, the financial sector will be only be included in scope in relation to their own operations and upstream supply chains. It has been agreed that their downstream financial operations will be excluded. This is contrary to the Parliament’s initial position and the ECB’s latest input and a big win for the EU Council and those Member States which pushed for the exclusion. However, the Parliament insisted on a review clause that allows for an inclusion of the downstream activities based on an impact assessment. Firms in the financial sector will, however, be impacted by these rules indirectly because they will likely be business partners of in-scope companies, who will then diligence them from a CSDDD perspective. 

It is also worth noting more generally that the CSDDD’s sister directive, the Corporate Sustainability Reporting Directive (CSRD), has a different scope and will effectively require certain entities not within scope of the CSDDD to conduct due diligence as part of their assessment of material impacts, risks and opportunities – in relation to both their own operations and value chain (more information on this directive is available on our website). The CSDDD agreement is therefore most definitely not the end of the story.

Obligations imposed on companies

In-scope companies will have to apply due diligence in their operations. They will have to identify, assess, prevent, mitigate, bring to an end and remedy any negative impact on human rights and the environment as defined by an annex to the directive that has been further fine-tuned during the trilogues. At the Parliament’s request, companies that identify adverse impacts on the environment or human rights by some of their business partners will also have to terminate those business relationships as a last resort when these impacts cannot be prevented or ended. Additional obligations include the introduction of a complaints mechanism, communication on due diligence policies and monitoring of the effectiveness.

Companies – including those active in the financial sector – will also be obliged to adopt and put into effect a transition plan for climate change mitigation in line with the Paris Agreement, which neatly ties in with the disclosure requirements under the CSRD. At the Parliament’s request, the management of companies with over 1000 employees will be entitled to receive financial benefits for implementing the plan.

Enforcement

On the one hand, the CSDDD relies on public enforcement by supervisory authorities in each Member State which will, among other things, be entitled to launch inspections and investigations and impose penalties on non-compliant companies. Penalties may include “naming and shaming” and fines of up to 5% of the net worldwide turnover, which was controversial until the last round of discussions with the Parliament prevailing with its proposal. Compliance with the CSDDD will also be relevant for the award of public contracts and concessions.

On the other hand, and equally controversial, the CSDDD includes provisions on civil liability. Affected persons will have the right to be compensated for damages and will have five years within which to bring claims. Moreover, trade unions or civil society organisations will also be entitled to bring claims. The CSDDD also includes provisions on the disclosure of evidence, injunctive measures, and the cost of the proceedings. Depending on the Member States’ implementation of those provisions, it will be interesting to see how civil claims will play out in practice as they are currently alien to many Member States’ regimes.

What’s next?

The provisional agreement reached on 14 December 2023 still needs to be endorsed and formally adopted by both the Parliament and the Council before being published in the Official Journal and entering into force 20 days later. 

Even if implementation and transition periods will affect the point in time when the new obligations will actually apply, in-scope companies should familiarise themselves now with the new provisions to ensure compliance and avoid sanctions and, in parallel, keep an eye on sector-specific and/or parallel national legislation. 

We will keep you updated on the details of the directive when the compromise text becomes publicly available.

For more information on the CSDDD and human rights, see: 

• Webinar recording: EU CSDDD political agreement reached at last – what was decided?
• Linklaters Business & Human Rights page.