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Corporate sustainability due diligence: Council and Parliament strike deal to protect environment and human rights

On 14 December 2023, the European Council and Parliament have reached a provisional deal on the Corporate Sustainability Due Diligence Directive (CSDDD), propelling the EU into a new era of environmental and human rights protection. The directive sets forth obligations addressing adverse impacts on human rights and the environment across their operations and business networks.

Milestones and Key Provisions: 

The CSDDD outlines a robust framework obligating large companies to scrutinize and mitigate environmental and human rights risks in their chain of activities. The directive includes responsibilities towards upstream partners and downstream subsidiaries and activities such as distribution and recycling. Notably, the directive introduces penalties and civil liabilities and mandates adopting a climate transition plan.

Scope and Financial Sector Exclusions: 

The agreement defines the directive's scope, targeting companies with over 500 employees and a net worldwide turnover exceeding EUR 150 million. The list of high-risk sectors to which lower thresholds are applicable has been introduced. It is to be finalized during technical discussion. Non-EU companies fall under the scope if they generate over EUR 150 million net turnover in the EU within three years of the directive's entry into force. While the regulators have temporarily excluded the financial sector, a review clause suggests potential inclusion after a comprehensive impact assessment.

Climate Change and Civil Liability:

The compromise strengthens climate change provisions, compelling companies to adopt transition plans for climate change mitigation and including financial incentives to members of the administrative, management or supervisory bodies. Civil liability enhancements grant affected parties a five-year window for claims, reinforcing access to justice. Companies identifying adverse impacts within their business partnerships must end the partnerships when prevention or resolution of negative impacts proves ineffective.

Penalties, Public Procurement, and Definitions: 

The provisional agreement incorporates penalties for non-compliance, with pecuniary penalties of a maximum of 5% (final figure TBD) of a company's net turnover. Important to highlight is that compliance with the CSDDD may become a criterion for public contract awards. The agreement clarifies obligations through an annex, referencing ratified international instruments and emphasizing the most prevalent human rights conventions. Additional insights from the technical trilogue sessions provide a glimpse into ongoing refinements. Notably, discussions revolve around defining the upstream and downstream chain of activities, especially the downstream definition among financial services.

Next Steps and Future Outlook: 

While the provisional agreement awaits formal adoption by both institutions, its transformative impact is already evident. With the Parliament expected to vote in February and April, this directive promises a paradigm shift in corporate responsibility. Member states will then have the task of transposing the directive into local law within two years after its entry into force. Given upcoming technical work and legal-linguistic checks, the expected full applicability of the CSDDD is in Q2 2027.

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