On 14 December 2023, the European Parliament and Council reached a provisional agreement on the Corporate Sustainability Due Diligence Directive (CSDDD) and the “list of rights and prohibitions that companies should respect”. The directive “aims to enhance the protection of the environment and human rights in the EU and globally”. In line with this, it sets out “obligations for large companies regarding actual and potential adverse impacts” in their own operations, as well as by their subsidiaries and business partners. It also “requires companies to adopt a plan ensuring that their business model and strategy are compatible with the Paris agreement” and its 1.5°C target. The directive “aims to hold big companies responsible for violations” throughout their supply chains.
🌱 To which sectors does it apply?
Through the CSDDD, the EU “aims to increase compliance [with] human rights and environmental standards worldwide”. The directive therefore has an extraterritorial effect and “targets all companies active in the EU market, even if their headquarters are outside the EU”. Its scope includes all “large [EU] companies [with] more than 500 employees and a net worldwide turnover over €150 million” and all “non-EU companies [with an] over €150 million net turnover generated in the EU”. Additionally, the directive will also apply to companies with over 250 employees and with a turnover of more than €40 million, if at least €20 million are generated through the trade of mineral resources, construction, agriculture and food manufacturing, or textiles. To avoid confusion, the European Commission will publish “a list of non-EU companies that fall under the scope of the directive”.
🌱 Does it sufficiently address the finance sector?
Under the recent agreement, banks must perform due diligence on their upstream activities. Banks and “financial corporations will also be required to adopt and put into effect […] climate plans”. Yet, financial services (such as the lending and investment activities of banks) have been temporarily excluded from the CSDDD’s scope. There will however be “a review clause for a possible future inclusion of the financial downstream sector based on a sufficient impact assessment”.
🌱 How will it be enforced?
Companies found in breach will be sanctioned, and they may also be sued by victims in European courts. The directive entails several injunction measures, and allows national supervisory bodies to issue sanctions of up to 5% of a non-compliant company’s global annual turnover. Moreover, failure to comply with the CSDDD may also lead to disqualification from public contracts and concessions. Victims may claim reparations from the company directly if they can demonstrate that a company’s “failure to follow proper due diligence procedures” caused a violation of their human rights or that they suffered from a breach of environmental standards. The CSDDD limits the “cost of the proceedings for claimants” and sets out a 5-year period for “those concerned by adverse impacts (including trade unions or civil society organisations)” to bring claims. As a last resort, companies may even have to end relationships with business partners if their negative impacts on human rights and the environment “cannot be prevented or ended”.