EU: New CSDDD compromise finally accepted by Member States

After an unprecedented back and forth, the negotiations about the Directive on Corporate Sustainability Due Diligence (CSDDD or CS3D) have made a big step forward today: The Directive was just endorsed at Council level based on a further compromise proposal the Belgian Council Presidency had put forward. Significant concessions had to be made in order to win the required majority of EU Member States. It now remains to be seen whether the EU Parliament will also approve the current text which waters down the compromise originally reached in the trilogue negotiations (read more on the conclusion of the trilogue negotiations in our blog post).

Amendments

The final text as endorsed by the Member States is not yet publicly available, but allegedly includes the following highlights:

• The thresholds for application of the CSDDD have been increased to ensure that smaller and medium companies do not directly fall under its scope, which has been one of the most critical aspects for some Member States. Originally, the CSDDD was supposed to apply to EU companies with 500 employees and worldwide turnover of more than EUR 150 million. In a compromise text circulated last week, these thresholds were already increased to 1000 employees and EUR 300 million turnover, with the latter threshold now being increased to EUR 450 million. Similarly, the threshold for non-EU companies was increased to EUR 450 million in the EU. According to estimates, the new thresholds will mean that approx. 5,500 companies will be in scope, which would be almost 70% less than under the political compromise reached in December. The compromise at Council level is also reported to add some anti-circumvention measures, including provisions relating groups of companies as well as amendments to the thresholds applicable to franchisors. Finally, the high-risk sectors approach has been deleted, but a review provision retains the possibility to pick this up at a later stage, if necessary.
• The chain of activities covered by the due diligence obligations has been one of the most controversial aspects and its definition was amended to focus on direct business partners rather than indirect ones. In particular, all references to financial activities as well as specificities of the financial sector have been deleted in the downstream part of the covered chain of activities to ensure that regulated financial undertakings will only be covered with regard to upstream activities. In this context it is also worth noting that the compromise no longer includes a provision requiring to reconsider the inclusion of downstream financial services, but the Commission is required to submit a report to the European Parliament and to the Council on the necessity to lay down additional sustainability due diligence requirements tailored to regulated financial undertakings.
• Climate transition plans remain mandatory (including in the financial sector), but large companies will no longer need to promote climate transition plans (e.g., through financial incentives).
• The controversial provision on civil liability was amended to give Member States greater flexibility. Most importantly, it will be for the Member States to provide for “reasonable conditions” under which injured parties may authorise NGOs or other organisations to bring actions to enforce their rights.
• New transition periods will apply based on a staged approach relating to the size of the company. An application period of 3 years from the entry into force will apply for companies with more than 5000 employees and EUR 1500 million turnover, a 4-year application period for companies with more than 3000 employees and EUR 900 million turnover, and a 5-year application period for all smaller companies falling under the scope of the CSDDD.

Next steps

It is now up to the EU Parliament to approve the current text in its final plenary sitting in April. In light of the upcoming elections in June, the file will probably be adopted under the so-called corrigendum procedure that allows for an accelerated process. Recent statements by parliamentarians, who seem to be very keen to see the Directive adopted in this legislative term, suggest that approval is possible even if the CSDDD has been heavily watered down and deviates significantly from the Parliament’s initial position.

Once approved by the Parliament, the final text will also have to be formally adopted by the Council before being published in the Official Journal and entering into force 20 days later. This will trigger the transposition period of 2 years for the Member States as well as transition periods based on the staged approach mentioned above.

We will keep you updated on the further progress.