Corporate sustainability due diligence (CSDD)
- Category: Sustainable finance
European Commission Proposal for a Directive on Corporate Sustainability Due Diligence (COM(2022) 71 final, 2022/0051 (COD)), published on 23 February 2022 (so-called CSDDD), will complement the NFRD and its amendments in the form of CSRD by adding a substantive corporate duty for some companies to perform due diligence to identify, prevent, mitigate and account for external harm resulting from adverse human rights and environmental impacts in the company’s own operations, its subsidiaries and in the value chain.
The European Commission document of 23 February 2022 (Questions and Answers: Proposal for a Directive on corporate sustainability due diligence) underlines that “for the first time ever, companies operating in the EU market will have common and clear rules on corporate sustainability due diligence”. Indeed, preventing legal fragmentation is mentioned among main objectives of the new initiative. As the European Commission underlines, some EU countries have developed national rules (such as France, Germany or the Netherlands) or want to do so (e.g. Austria, Belgium, Finland, Denmark) but the scope of these measures varies a lot from one country to the other. Moreover, there are many voluntary initiatives in place. This causes legal uncertainty for companies across the EU.
The Accounting Directive (2013/34/EU), as amended by the CSRD, requires large companies and listed small and medium-sized companies (SMEs), as well as parent companies of large groups, to include in a dedicated section of their management report the information necessary to understand the company's impacts on sustainability matters, and the information necessary to understand how sustainability matters affect the company's development, performance and position.
This information must be reported in accordance with European Sustainability Reporting Standards (ESRS), which include, among others, a requirement to describe the due diligence process implemented by the undertaking with regard to sustainability matters.
Of particular relevance of the CSRD is that it mandates disclosure of plans of an undertaking to ensure that its business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement.
The two initiatives are closely interrelated:
- first, a proper information collection for reporting purposes under the CSRD requires setting up processes, which is closely related to identifying adverse impacts in accordance with the due diligence duty set up by Directive on corporate sustainability due diligence;
- second, the CSRD will cover the last step of the due diligence duty, namely the reporting stage, for companies that are also covered by the CSRD;
- third, Directive on corporate sustainability due diligence will set obligations for companies to have in place the plan ensuring that the business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement on which the CSRD requires to report.
Thus, the intention of the Directive on corporate sustainability due diligence is to lead to companies’ reporting being more complete and effective and the complementarity to increase effectiveness of both measures and drive corporate behavioural change for those companies.
Corporate sustainability due diligence
If adopted, the CSDDD would:
- introduce requirements for companies to identify and prevent, bring to an end, or mitigate the actual and potential impacts of their activities on the environment and on human rights abuses;
- oblige companies to conduct due diligence on their own operations and on the activities of their subsidiaries and other entities in their value chains with which they have direct and indirect established business relationships;
- oblige companies develop and implement prevention action plans.
Directors' duty of care
According to the European Commission's legislative proposal duties for the directors of the EU companies are also introduced. These duties (directors' duty of care) include setting up and overseeing the implementation of the due diligence processes and integrating due diligence into the corporate strategy. In addition, when fulfilling their duty to act in the best interest of the company, directors must take into account the human rights, climate change and environmental consequences of their decisions.
Council general approach on the Directive on Corporate Sustainability Due Diligence published on 30 November 2022 instead of directors' duty of care proposes that due diligence processes be incorporated into risk management systems and company policies (the European Commission proposal to base variable remuneration on directors' contributions to sustainability has been also deleted).
According to the European Commission's legislative proposal companies would be liable for damages if they fail to comply with obligations to prevent, bring to an end, or mitigate any potential adverse impacts — including where any failure subsequently leads to an adverse impact that could have been avoided. The European Commission document of 23 February 2022 (Questions and Answers: Proposal for a Directive on corporate sustainability due diligence) emphasises that the proposal will give those affected by harm the opportunity to hold companies to account. This means that victims will have the possibility to bring a civil liability claim before the competent national courts. Such civil liability concerns companies' own operations and its subsidiaries and established business relationships with which a company cooperates on a regular and frequent basis, where the harm could have been identified, and prevented or mitigated, with appropriate due diligence measures.
Supplementing the above provisions on civil liability the Council clarified the four conditions to be met for a company to be held liable:
- damage caused to a natural or legal person,
- breach of the duty,
- a causal link between the damage and the breach of the duty,
- a fault (intention or negligence).
Main elements of the agreement struck by the Council and Parliament on 14 December 2023
On 14 December 2023 the Council and Parliament reached a provisional deal on the corporate sustainability due diligence directive (CSDDD). According to the communication of the same date main are as follows.
Obligations for companies
The due diligence directive lays down rules on obligations for large companies regarding actual and potential adverse impacts on the environment and human rights for their business chain of activities which covers the upstream business partners of the company and partially the downstream activities, such as distribution or recycling.
The directive also lays down rules on penalties and civil liability for infringing those obligations; it requires companies to adopt a plan ensuring that their business model and strategy are compatible with the Paris agreement on climate change.
Scope of the directive
The agreement fixes the scope of the directive on large companies that have more than 500 employees and a net worldwide turnover of €150 million. For non-EU companies it will apply if they have a €150 million net turnover generated in the EU, three years from the entry into force of the directive. The Commission will have to publish a list of non-EU companies that fall under the scope of the directive.
The financial sector will be temporarily excluded from the scope of the directive, but there will be a review clause for a possible future inclusion of this sector based on a sufficient impact assessment.
Climate change and civil liability
The compromise strengthens the provisions related to the obligation of means for large companies to adopt and put into effect, through best efforts, a transition plan for climate change mitigation.
On civil liability, the agreement reinforces the access to justice of persons affected. It establishes a period of five years to bring claims by those concerned by adverse impacts (including trade unions or civil society organisations). It also limits the disclosure of evidence, injunctive measures, and cost of the proceedings for claimants.
As a last resort, companies that identify adverse impacts on environment or human rights by some of their business partners will have to end those business relationships when these impacts cannot be prevented or ended.
For companies that fail to pay fines imposed on them in the event of violation of the directive, the provisional agreement includes several injunction measures, and takes into consideration the turnover of the company to impose pecuniary penalties (i.e. a minimum maximum of 5% of the company’s net turnover). The deal includes the obligation for companies to carry out meaningful engagement including a dialogue and consultation with affected stakeholders, as one of the measures of the due diligence process.
The deal establishes that compliance with the CSDDD could be qualified as a criterion for the award of public contracts and concessions.
The provisional agreement clarifies the obligations for companies described in Annex I, a list of specific rights and prohibitions which constitutes an adverse human rights impact when they are abused or violated. The list makes references to international instruments that have been ratified by all member states and that set sufficiently clear standards that can be observed by companies.
The compromise adds new elements to the obligations and instruments listed in the Annex as regards human rights, particularly for vulnerable groups and core International Labour Organisation (ILO) Conventions, which can be added to the list, by delegated acts, once they have been ratified by all member states.
The provisional agreement also introduces in the annex references to other UN conventions the International covenant on civil and political rights or the International covenant on economic, social and cultural rights, or the Convention on the rights of the child. Likewise, the compromise clarifies the nature of environmental impacts covered by this directive as any measurable environmental degradation, such as harmful soil change, water or air pollution, harmful emissions or excessive water consumption or other impacts on natural resources.