In the early hours of December 14, 2023, the Council of the EU (“Council”) and the European Parliament (“Parliament”) reached a provisional political agreement on the Corporate Sustainability Due Diligence Directive (“CSDDD”). Described as a “historic breakthrough” by Lara Wolters, who has led this file for the Parliament, the CSDDD will require many companies in the EU and beyond to conduct environmental and human rights due diligence on their global operations and value chain, and oblige them to adopt a transition plan for climate change mitigation.

Given the CSDDD’s relevance for companies’ ongoing compliance planning on environmental and human rights matters, this blog aims to advise clients on the basic elements of the CSDDD agreement based on press releases from the CouncilParliament, and the European Commission (“Commission”), even if much uncertainty remains. Although a political agreement has been reached, the text of the agreement is not publicly available and a number of details of the legal text will need to be finalized in follow-up technical meetings. Covington will publish a more detailed alert on “how to prepare” for the CSDDD once the full text is available (likely in early 2024).

In Short

After intense negotiations since the Commission published its proposal in February 2022, the Directive is set to lay down significant due diligence obligations for large companies regarding actual and potential adverse impacts on human rights and the environment, with respect to their own operations, those of their subsidiaries, and those carried out by their business partners.

It appears that agreement has been reached between the co-legislators on some of the hotly contested details of the legislation, including: the definition of the value chain in scope; application of obligations to the financial sector; and penalties and civil liability for non-compliance.

Large companies, including those in the financial sector, reportedly must adopt a plan ensuring their business model complies with limiting global warming to 1.5°C. This may have significant implications for companies’ current voluntary net-zero commitments and transition plans.

Scope of the Directive

The deal reached by the Council and the Parliament reportedly fixes the scope of the CSDDD on:

  • EU companies having more than 500 employees and a net worldwide turnover of €150 million (although lower thresholds will apply for companies in certain “high-risk sectors”); and
  • non-EU companies with €150 million net turnover generated in the EU (although there are some discrepancies regarding the applicable thresholds between the three press releases). The Council press release reports that the Commission will be tasked with publishing a list of in-scope non-EU companies.

While small- and medium-sized enterprises appear to be outside the scope of the Directive, they will nonetheless likely be impacted indirectly by the due diligence that in-scope companies will be required to do on their value chains.

Date of Application

It is not clear from public information when the CSDDD will apply to EU and non-EU companies. As a Directive, the CSDDD will first need to be transposed into the national law of the EU Member States (as well as in Iceland, Liechtenstein, and Norway) to apply to companies. Under EU law, Member States are usually given two years for this transposition. Some sources suggest that the CSDDD will start to apply to the largest companies in 2027 and then pull additional companies into scope in the two subsequent years (i.e., 2028 and 2029).

Value Chain in Scope

During negotiations, each EU institution put forward a different position on the definition of value chain that should be in scope of the due diligence obligations, and we await clarity on the exact legal definition in the final text. Reportedly, due diligence obligations will cover in-scope companies’ “own operations, those of their subsidiaries and those carried out by their business partners.” The Council’s press release refers to coverage of a company’s “business chain of activities which covers the upstream business partners of the company and partially the downstream activities, such as distribution or recycling.” The Parliament’s press release suggests a slightly wider application.

Applicability to the Financial Sector

The Council’s press release indicates that co-legislators agreed that entities within the financial sector will be “temporarily excluded” from the scope of the CSDDD’s due diligence obligations, though they will have an obligation to adopt a climate transition plan. Other sources suggest a wider application to the financial sector. We will provide more clarity once the text is available.

Due Diligence Obligations

The Directive will include a range of due diligence obligations for companies, including:

  • Integration of due diligence into policies and risk management systems;
  • Identification, assessment, prevention, mitigation and remediation of adverse impacts on human rights and the environment in a company’s own operations, and that of its subsidiaries and in-scope business partners. Relevant adverse impacts appear to include “child labor, slavery, labor exploitation, production and use of prohibited persistent organic pollutants, deforestation, excessive water consumption or damage to ecosystems.” Reportedly, agreement has been reached on specific rights and obligations that constitute human rights and environmental impacts, by reference to international conventions, which will be set out in an Annex to the Directive. The final text will include the specifics on exact due diligence measures, including, for example, obligations with respect to stakeholder engagement and the termination of business relationships as a last resort.
  • Adoption and implementation of a climate change transition plan, to ensure that a company’s business model complies with limiting global warming to 1.5°C. The company size and jurisdictional applicability thresholds are still currently unclear. This obligation will add to the disclosures under the Corporate Sustainability Reporting Directive (“CSRD”), which does not by itself require companies to have climate change transition plans. For companies in scope of both this new CSDDD requirement and the CSRD’s reporting requirements, this likely means that they will have to report on their transition plan as part of their annual CSRD disclosure. This potentially heightens the associated legal risks.

Enforcement

Provisional agreement was also reached on enforcement. Reportedly:

  • Supervision: Each EU Member State will designate a supervisory authority to monitor whether companies are complying with their due diligence obligations, with mechanisms in place for these bodies to cooperate at an EU level within a European Network of Supervisory Authorities established by the Commission.
  • Administrative liability: These supervisory bodies will be able to launch inspections and investigations and impose penalties on non-compliant companies, including “naming and shaming” and, reportedly, fines of up to 5% net turnover. Where companies fail to settle fines, the provisional agreement encompasses injunction measures.
  • Civil liability: Member States must provide new civil liability procedures to allow for in-scope companies to be held liable for the damage caused by breaching their due diligence obligations. Impacted persons and their representatives (potentially including trade unions and civil society organizations) will have a five-year window to lodge damages claims. These civil liability procedures will be additional to existing national procedures. To assess the arising legal risks it will be critical to analyze the final text of this provision and draw out its extensions to existing liability mechanisms.

Next Steps The provisional agreement now needs to be formally approved by the Parliament and the Council before it can enter into force. Transposing the agreement into the agreed legal text will involve further detailed technical negotiation and will likely impact the specifics of how the CSDDD applies to companies. After the CSDDD is formally adopted and published in the EU Official Journal, it will need to be transposed by Member States into national legislation.

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Photo of Hannah Edmonds-Camara Hannah Edmonds-Camara

Hannah Edmonds-Camara advises on a range of both international and domestic employment issues including drafting and implementation of policies and compliance programmes, international employment aspects of global transactions and contentious employment matters.

She also has particular expertise in helping businesses navigate the evolving…

Hannah Edmonds-Camara advises on a range of both international and domestic employment issues including drafting and implementation of policies and compliance programmes, international employment aspects of global transactions and contentious employment matters.

She also has particular expertise in helping businesses navigate the evolving global regulatory and best practice landscape surrounding the corporate responsibility to respect human rights. Her experience includes advising on: the development and implementation of global human rights due diligence and ethical sourcing compliance programmes, including in response to pressure from NGOs, investors and regulators; human rights due diligence in an M&A context; global risk assessments; transparency and reporting requirements; design of project-specific human rights frameworks and stakeholder engagement strategies; assessment of downstream human rights risk; and conflict minerals compliance.

Hannah gained valuable experience while on secondment to a large pharmaceutical client. She is a member of the firm’s Diversity Committee, Public Service (pro bono) Committee, and Africa Initiative.

Photo of Daniel Feldman Daniel Feldman

Drawing on his prior positions in government service spanning multiple Administrations, former Ambassador Dan Feldman’s practice focuses on environmental, social, and governance (ESG) counseling, business and human rights (BHR), global public policy, as well as broader international regulatory compliance. He is a member…

Drawing on his prior positions in government service spanning multiple Administrations, former Ambassador Dan Feldman’s practice focuses on environmental, social, and governance (ESG) counseling, business and human rights (BHR), global public policy, as well as broader international regulatory compliance. He is a member of the firm’s Global Problem Solving initiative.

As Chief of Staff and Counselor to Secretary John Kerry when he was appointed the first Special Presidential Envoy for Climate (SPEC) by President Biden, Dan helped drive the U.S. government’s international climate agenda, coordinating high level interagency policy-making, engaging with corporate stakeholders, and contributing to key bilateral and multilateral climate discussions, including last year’s Leaders’ Summit on Climate and the landmark UN Conference of Parties (COP26) in Glasgow.

Previously, Dan served as deputy and then U.S. Special Representative for Afghanistan and Pakistan at the U.S. Department of State in the Obama Administration, as Director of Multilateral and Humanitarian Affairs at the National Security Council in the Clinton Administration, and as Counsel and Communications Adviser to the U.S. Senate Homeland Security and Governmental Affairs Committee. He also has served as a senior foreign policy and national security advisor to a number of Democratic presidential and Congressional campaigns.

Dan has extensive experience counseling multinational corporations on mitigating risk and maximizing opportunities in the development and implementation of their ESG and sustainability strategies, with a particular background in advising on BHR matters. He was one of the first attorneys in the U.S. to develop a practice in corporate social responsibility, and has been cited by Chambers for his BHR expertise. He assists clients in strategizing about their engagements with a range of key stakeholders, including Members of Congress, executive branch officials, foreign government officials and Embassy representatives, multilateral institutions, trade and industry associations, non-governmental organizations, opinion leaders, and journalists.

Photo of Cándido García Molyneux Cándido García Molyneux

Cándido García Molyneux provides clients with regulatory, policy and strategic advice on EU environmental and product safety legislation. He helps clients influence EU legislation and guidance and comply with requirements in an efficient manner, representing them before the EU Courts and institutions.

Cándido…

Cándido García Molyneux provides clients with regulatory, policy and strategic advice on EU environmental and product safety legislation. He helps clients influence EU legislation and guidance and comply with requirements in an efficient manner, representing them before the EU Courts and institutions.

Cándido co-chairs the firm’s Environmental Practice Group.

Cándido has a deep knowledge of EU requirements on chemicals, circular economy and waste management, climate change, energy efficiency, renewable energies as well as their interrelationship with specific product categories and industries, such as electronics, cosmetics, healthcare products, and more general consumer products.

In addition, Cándido has particular expertise on EU institutional and trade law, and the import of food products into the EU. Cándido also regularly advises clients on Spanish food and drug law.

Cándido is described by Chambers Europe as being “creative and frighteningly smart.” His clients note that “he has a very measured, considered, deliberative manner,” and that “he has superb analytical and writing skills.”

Photo of Paul Mertenskötter Paul Mertenskötter

Paul Mertenskötter is an associate in the firm’s Brussels office and a member of the Public Policy and International Trade practice groups. He advises multinational companies, governments, and other clients on a range of matters related to public policy, international trade, and new…

Paul Mertenskötter is an associate in the firm’s Brussels office and a member of the Public Policy and International Trade practice groups. He advises multinational companies, governments, and other clients on a range of matters related to public policy, international trade, and new technologies. Mr. Mertenskötter’s practice encompasses advising clients on the European Commission’s Digital Single Market strategy, including on the Payment Services Directive (PSD 2).

Prior to joining the firm, Mr. Mertenskötter clerked at the International Court of Justice in The Hague, and was a Fellow at the Institute for International Law and Justice at NYU Law School. His work has been published with Oxford University Press and the Cornell Law Review.

Photo of Emma Sawatzky Emma Sawatzky

Emma Sawatzky is an associate in the BHR, ESG, and Employment Practice Groups. Emma advises clients on a number of BHR-related matters, including: modern slavery statements; BHR-related investigations; human rights-related OECD proceedings; supply chain due diligence frameworks, human rights policies, supplier risk assessments…

Emma Sawatzky is an associate in the BHR, ESG, and Employment Practice Groups. Emma advises clients on a number of BHR-related matters, including: modern slavery statements; BHR-related investigations; human rights-related OECD proceedings; supply chain due diligence frameworks, human rights policies, supplier risk assessments, and supply chain tracing exercises. She has experience providing tailored advice to clients on ESG and BHR legal and regulatory developments in the UK, EU, and the MENA region.

Emma is a member of the firm’s Diversity, Equality, and Inclusion Committee.

Photo of Bart Van Vooren Bart Van Vooren

Bart Van Vooren has a broad life sciences practice supporting innovative pharmaceutical, food, medtech and biotech companies on EU regulatory, commercial and strategic policy assignments. He is widely recognized for his expertise on general EU law and procedure, as well as his extensive…

Bart Van Vooren has a broad life sciences practice supporting innovative pharmaceutical, food, medtech and biotech companies on EU regulatory, commercial and strategic policy assignments. He is widely recognized for his expertise on general EU law and procedure, as well as his extensive litigation experience before the EU Court of Justice in dozens of cases.

Over the past seven years, Mr. Van Vooren has developed a niche practice on compliance with the Biodiversity Convention and the Nagoya Protocol, a set of rules to combat bio-piracy worldwide. He has accumulated unique, practical experience in dozens of jurisdictions around the world, and has handled everything from benefit-sharing negotiations, over compliance programs, to inspections by authorities.

Finally, Mr. Van Vooren has an active pro bono practice assisting NGOs defending the human rights of persons with a disability through strategic litigation.