Update on proposed EU Corporate Sustainability Due Diligence Directive

Key messages

On 30 November 2022, the Council submitted a revised proposal for a Directive on Corporate Sustainability Due Diligence, containing the following key messages:

1. Duty for companies to conduct human rights and environmental due diligence in their supply chain (aligned with the OECD Due Diligence Guidance for Responsible Business Conduct) maintained as a proposed new requirement
2. Proposal to delete director’s duty of care for sustainability so the board of directors are not required to consider the consequences of their decisions for sustainability matters in EU or national laws
3. Proposal to no longer require integration of sustainability into the business strategy
4. Proposal to no longer require linking variable remuneration to combating climate change by requiring inclusion of metrics to reduce greenhouse gas emissions

Key amendments 

The current text from the Council now includes these key amendments:

• Deletion of specific provisions on directors’ duty of care and setting up and overseeing due diligence (responsibility to set up and oversee due diligence actions would now be under the company’s policies and risk management systems)
• Deletion of the provision requiring linking variable remuneration of directors to their contribution to the company’s business strategy and long-term interest and sustainability
• Amendment of the provision on civil liability to clarify terms and avoid unreasonable interference with Member States’ liability systems
• Reduction of initial scope with amendments replacing ‘value chain’ by ‘chain of activities’ (equivalent to supply chain), removing from the scope financial products (AIFs, UCITs) and an option to scope out pension institutions that are social security schemes 
• Clearer due diligence obligations for groups with a new specific article on parents’ and subsidiaries’ obligations
• Lighter due diligence obligations for regulated financial undertakings

Proposed scope of companies and revised timeline

The overall logic of the scope and the thresholds of the number of employees and the net turnover have been kept as in the Commission’s proposal. However, the compromise text also includes a phase-in approach with additional years for implementation. 

Therefore, the rules of the proposed Directive shall first apply to very large companies that have more than 1.000 employees and more than EUR 300 million in net worldwide turnover, or EUR 300 million in net turnover generated in the EU for non-EU companies. They have 3 years for implementation from when the Directive entry into force.

Companies that have more than 500 employees and have a net worldwide turnover of more than EUR 150 million, or EUR 150 million in net turnover generated in the EU for non-EU companies, have 4 years for implementation from when the Directive entry into force. 

Companies that did not reach these thresholds, but had more than 250 employees on average and had a net worldwide turnover of more than EUR 40 million, will have 5 years from when the Directive entry into force, provided that at least EUR 20 million was generated in one or more of the following risk sectors: textiles; agriculture; or the extraction of mineral resources. The same deadline will apply to non-EU companies with net worldwide turnover of more than EUR 40 million, provided that at least EUR 20 million was generated in one or more of the risk sectors mentioned.

The Directive shall apply to a company if the company has met the conditions laid down above during two consecutive financial years.

Details on the due diligence requirements 

Companies will be required to conduct human rights and environmental due diligence as laid down in the Directive. This will encompass the following actions: 

1. integrating due diligence into policies and risk management systems, and have in place a due diligence policy containing the company’s approach, code of conduct to be followed, and the processes put in place for implementation 
2. identifying actual and/or potential adverse human rights and environmental impacts, for example by mapping all areas of own operations, those of subsidiaries, and where related to their chain of activities, those of their business partners. The prioritisation of adverse impacts shall be based on severity and likelihood of the adverse impact. Severity of an adverse impact shall be assessed based on its gravity, the number of persons or the extent of the environment affected, and difficulty to restore the situation prevailing prior to the impact.
3. preventing and mitigating potential adverse human rights and environmental impacts, and bringing them to an end and minimising their extent
4. establishing and maintaining a complaints procedure,
5. monitoring the effectiveness of due diligence policy and measures 
6. publicly communicating on due diligence

Companies will be entitled to share resources and information within their respective groups of companies and with other legal entities. Companies shall not be obliged to disclose information that is deemed to be a trade secret.

Next steps

At the European Parliament (EP), after amendments are tabled by other political group, the JURI Committee is expected to vote in March 2023, to be followed by a vote by the plenary EP in May 2023. After the May 2023 EP vote, negotiations will start between the EP and Council to agree on a common text (trilogue process).

Source

Proposal for a directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937 – 30 November 2022

Deloitte

Nordic Board & Executive Advisory, 5 December 2022