About the author: Ana Santos Duarte is a lawyer and a consultant specialising in Business & Human Rights. Throughout her professional career she has provided legal advice to companies on Business & Human Rights matters and to third sector organisations. She actively participates in research projects, collaborates with various stakeholders, provides trainings and writes articles and newsletters on legal and jurisprudential developments in the area of ESG/Business & Human Rights. Ana has a Postgraduate degree in Corporate Law from the Private Law Research Centre, Institute for Private Law of the Faculty of Law of the University of Lisbon and a Bachelor of Law from the Faculty of Law of the University of Lisbon.
I. Where are we now?
The adoption of the Corporate Sustainability Due Diligence Directive[1] (CSDDD) was approved, on the 15th of March 2024, by Committee of Permanent Representatives of the Governments of the Member States of the European Union (COREPER) and, on the 19th, by the European Parliament’s Committee on Legal Affairs (JURI).This means that after three years since the first text of this proposed Directive was approved by the European Parliament[2], the CSDDD is now closer to being approved in the European Union (EU).
This Directive aims to operationalise the responsibility of companies to respect human rights, as set out in the UNGPs, and environmental norms, by creating an obligation for them to conduct risk-based human rights and environmental due diligence[3]. By implementing this due diligence process, companies will have to identify, prevent, mitigate, respond to, and remediate human rights violations and environmental damage in their global upstream and downstream value chains[4].
In this sense, the CSDDD is meant to be applied to companies in the EU with an average of more than 1,000 employees and a worldwide net turnover of more than 450 million euros, and to companies in third countries with a net turnover in the EU of more than 450 million euros.[5] However, the CSDDD provides for a gradual entry into force[6], which means that:
- After 3 years, from the date of its entry into force, it will cover EU companies with more than 5000 employees and €1500 million net turnover worldwide and third country companies with more than €1500 million net turnover in the EU;
- After 4 years, it will apply to companies with more than 3000 employees and €900 million net turnover worldwide and companies from third countries with more than €900 million net turnover in the EU; and
- After 5 years, it will become applicable to companies with more than 1,000 employees and €450 million net turnover worldwide and companies from third countries with more than €450 million net turnover in the EU.
In addition, it is stipulated that companies will be held civilly liable in the event of non-compliance, and a minimum period of five years is established for those affected by the adverse impacts to lodge complaints, without prejudice to national rules on civil proceedings[7]. Similarly, the CSDDD contains elements on the disclosure of evidence, precautionary measures, and a reference to the cost of the process for claimants[8].
In parallel to the above obligation, the Directive requires companies to adopt and implement a transition plan for climate change mitigation that aims to ensure, through best endeavours, the compatibility of the business model and strategy with the transition to a sustainable economy and the limitation of global warming to 1.5 °C[9].
II. What brought us here?
The CSDDD was the result of a long and dreadful democratic process between the EU institutions. The most recent facts that lead us to what has happened to date take us back to June 2023, when a majority of Members of the European Parliament supported enhancing the original legislative proposal for the CSDDD. An agreement was reached in the EU Parliament in December 2023, but uncertainties arose after last-minute objections from key Member States, postponing the vote on the approval in the EU Council. The approval of the CSDDD appeared imminent until February 28th, when the provisional agreement failed to gain endorsement in the EU Council due to objections from countries like Germany and Italy. After that Germany’s abstention was announced, driven by concerns from the minority coalition party, the FDP, regarding the bureaucratic and legal impact on companies, with Chancellor Scholz offering no opposition. Italy withdrew its support subsequently. Additionally, France proposed a last-minute increase in the company threshold. After months of negotiations, France, Germany, and Italy retreated, casting doubt on EU democratic processes and stalling the CSDDD vote, despite broad public support from civil society, trade unions, and even businesses. At one juncture, it seemed these actions might jeopardize all efforts toward the Directive. Fortunately, under the strong guidance of the Belgian Presidency, a compromise was reached to secure a majority at the COREPE. And days later, the JURI Committee also approved the CSDDD, with 20 members voting in favour, four against and no abstentions.
This intense debate over the recent months has left perceptible marks on the approved text of the CSDDD. Despite the contentious discussions, a compromise has been reached, encapsulating several pivotal elements within the Directive:
- Scope: The scope of the directive has undergone considerable adjustments, which have significantly reduced its reach. Furthermore, industries with significant environmental impacts, like agriculture, will no longer have a lower employee threshold, and certain activities such as product disposal, dismantling, recycling, composting, and landfill are excluded from due diligence duties[10].
- Regulated financial undertakings: Specific provisions have been established for the financial sector, focusing primarily on the upstream part of financial activities[11]. Financial institutions will undergo a review and reporting process to determine additional due diligence requirements tailored to their operations[12].
- Combating climate change: As mentioned, the directive mandates companies to adopt and implement climate transition plans in line with the Paris Agreement. Notably, the requirement now focuses on means rather than results, aligning with the Corporate Sustainability Reporting Directive (CSRD) and offering exemptions for CSRD-compliant companies[13].
- Annex amendments: The Annex of the Directive has been updated to include new elements addressing human rights and environmental impacts. This includes highlighting vulnerable groups and core International Labour Organization (ILO) Conventions, as well as expanding the definition of environmental impacts to include deforestation and ecosystem services[14].
- Other issues: Termination is considered a last resort, with provisions for responsible disengagement[15]. A new article on meaningful engagement with stakeholders was included, defining stakeholders, and outlining consultation processes[16]. Lastly, the articles on the Directors’ duty of care and overseeing due diligence were deleted and companies are no longer mandated to provide financial incentives to directors for the implementation of climate transition plans.
III. Is this the end of the beginning?
As the CSDDD progresses to the plenary session of the European Parliament in April 2024 for its final vote, it signifies not the end, but rather the beginning of a transformative journey. Once formally approved, this directive will mark a significant milestone in the promotion of human rights and environmental sustainability, positioning the EU as a global leader in this endeavour.
Nevertheless, it is essential to acknowledge that while groundbreaking, the CSDDD’s scope currently encompasses only a fraction of the EU’s commercial activities and companies, estimated at around 0.05 percent[17]. This partial coverage underscores the ongoing challenge of achieving comprehensive sustainability objectives.
However, this directive sets a crucial precedent, signalling a shift towards corporate accountability for human rights and environmental violations. It serves as a catalyst for change, compelling businesses to reassess their social responsibilities and paving the way for a more equitable and sustainable future. In essence, the approved CSDDD is not the culmination, but rather the commencement of fostering a level playing field for sustainable practices within the EU.
[1] Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, 2022/0051 (COD).
[2] See Ana Santos Duarte, “Proposta de Diretiva relativa ao Dever de Diligência das Empresas e a Responsabilidade Empresarial”, Nova Centre on Business, Human Rights and the Environment Blog, 10 May 2021. Available at: https://novabhre.novalaw.unl.pt/proposta-diretiva-responsabilidade-empresarial/.
[3] Article 4.
[4] Article 6.
[5] Article 2.
[6] Article 30.
[7] Article 22.
[8] Article 22.
[9] Articles 1.
[10] Recital 18.
[11] Article 3, point (a) and (g).
[12] Article 29.
[13] Article 15.
[14] Annex of the Directive.
[15] Articles 7 and 8.
[16] Article 8, point (d).
[17] See Sabela Gonzalez Garcia, “REACTION CSDDD endorsement brings us 0.05% closer to corporate justice”, European Coalition for Corporate Justice Blog, 15 March 2024. Available at: https://corporatejustice.org/news/reaction-csddd-endorsement-brings-us-0-05-closer-to-corporate-justice/.
Suggested citation: A. S. Duarte, ‘The Corporate Sustainability Due Diligence Directive: Is this the end of the beginning?’, Nova Centre on Business, Human Rights and the Environment Blog, 27th March 2024