Mandatory Due Diligence – Threat or Opportunity?

In part 3 of this series we discussed the contents and scope of the difficult-to-read Corporate Sustainability Due Diligence Directive (CSDDD). When this part was written, the text of the Directive was not yet final. The penultimate part of this series on mandatory due diligence will discuss the most recent developments regarding the proposed Directive.

The CSDDD was initially published by the European Commission on February 23rd 2022. Almost a year later, on December 1st 2022, the Council of the European Union agreed on its negotiation position on the proposed Directive. The Council presented several amendments, 

including the expansion of the scope of the due diligence obligation to all ‘business partners’ in a company’s ‘chain of activities’. The Council Position emphasised a risk-based approach and proposed to remove Articles 25 and 26 concerning personal liability for directors.  

On April 25th 2023 the Committee on Legal Affairs of the European Parliament adopted a draft report proposing several other amendments to the CSDDD. Eventually, on June 1st 2023, the European Parliament voted on the Directive in its plenary and established its official position. Several amendments were adopted by 366 votes to 225, with 38 abstentions. The three key amendments proposed by the European Parliament concern: the CSDDD’s scope of application, director’s liability and the system of pecuniary sanctions. 

Firstly, the European Parliament has proposed to widen the Directive’s application scope significantly to include smaller companies and all companies in the financial sector. Just for comparison, the Commission’s original Directive applied to all companies that had more than 500 employees on average and a worldwide turnover of more than EUR 150 million. According to the European Parliament, the CSDDD should apply to all EU-based companies that have more than 250 employees and a worldwide turnover (pure income) of more than EUR 40 million. 

Secondly, the European Parliament also proposed to remove Article 26 which concerns director’s liability, yet they decided to leave Article 25 intact. 

Thirdly, the European Parliament proposes to rigidify the Directive’s sanctioning system. Originally, Article 20 stated that pecuniary sanctions shall be based on the company’s turnover. The amended Article proposes that pecuniary sanctions shall be based on the company’s net worldwide turnover and that the ‘maximum limit of pecuniary sanctions shall be not less than 5% of the net worldwide turnover of the company in the business year preceding the fining decision’. 

Now that the Commission, the Council and the European Parliament have presented their proposal and amendments, interinstitutional negotiations can commence in accordance with the ordinary legislative procedure. This means that these three institutions try to agree on a complete set of amendments to the proposed Directive and will have to agree on several negotiation issues such as the inclusion of financial services, whether the due diligence obligation applies to the value chain or the supply chain (upstream/downstream), the conditions for civil liability and the possibility of director’s liability and its consequences. 

The Commission, Council and the European Parliament are not expected to agree on a joint text before 2024. Once the Directive has been formally adopted and published in the EU’s Official Journal, Member States will have two years to implement the Directive’s measures into national law.