Following extended negotiations, the directive was endorsed with a significantly narrower scope that would reduce the number of companies affected.
By Paul A. Davies, Michael D. Green, and James Bee
On 15 March 2024, EU Member States endorsed the Belgian Presidency’s political deal on the Corporate Sustainability Due Diligence Directive (CSDDD), despite Germany abstaining from the vote.
The CSDDD would require companies to conduct due diligence to identify and assess environmental and human rights issues across their value chain, and to take steps to prevent and eliminate them.
Timeline and Background
The European Commission originally proposed the CSDDD in February 2022, which would require in-scope companies to conduct due diligence on a number of ESG-related issues throughout their supply chain, with failure to do so resulting in possible fines and civil liability. For more information on the original proposal, refer to this Latham blog post.
The European Council (Council) adopted its position in December 2022, and the European Parliament (Parliament) did the same in June 2023. In December 2023, the Council and Parliament reached a provisional agreement on the CSDDD, following extensive negotiation on a number of key areas of the proposed CSDDD, including the scope, approach to financial institutions, requirement for a transition plan, and approach to small- and medium-sized enterprises. For more information on the provisional agreement, see this Latham blog post.
Following the provisional agreement, the CSDDD required endorsement and formal adoption by the Council and Parliament. In late February and early March 2024, votes on the proposed CSDDD were postponed after some Member States, notably Germany and Italy, indicated that they would abstain.
The Belgian Presidency of the EU circulated a new draft of the CSDDD to Member States on 5 March 2024 including certain concessions, which the EU Member States eventually endorsed following further amendment on 15 March 2024.[1]
Details of the Agreement
Compared to the provisional agreement reached in December 2023, this agreement is understood to contain particular concessions, particularly in relation to scope.
The revised text is understood to provide for a higher turnover threshold for companies to fall within the CSDDD’s scope: €450 million as a minimum worldwide turnover for EU companies, and a minimum €450 million turnover generated in the EU for non-EU companies that fall under the CSDDD (up from €150 million in the provisional agreement).[2] The employee threshold for EU companies has also increased from 500 to 1,000. Under this new threshold, only a third of companies previously covered by the CSDDD are estimated to fall within the directive’s scope.
Other notable changes include removal of the requirement for companies to promote the implementation of their transition plans through, among others, financial incentives to management and board members, as well as the removal of the separate Parliament-Council political declaration concerning the future adoption of due diligence rules for financial services.
Next Steps
A vote is scheduled in the European Parliament’s JURI Committee on 19 March 2024. The European Parliament plenary vote of the agreement is then expected to take place in April 2024.
If adopted, the agreement would be implemented through a staged approach, beginning with the largest companies after a three-year period.
Latham & Watkins will review the text of the CSDDD when it is available, and continue to monitor developments relating to the CSDDD and other legal initiatives on supply chain due diligence in the EU and globally.
Endnotes
[1] In order to pass the vote a qualified majority is required, meaning at least 15 EU Member States representing at least 65% of the population.
[2] The “high-risk” sectors approach has also been removed. For more information on this approach, refer to this Latham blog post.