Update 19 February 2024: The vote on the directive has been postponed because, among other things, Germany has announced it will abstain. At the moment, the vote is no longer on the agenda. In order to pass, a qualified majority of 15 countries representing at least 65% of the EU population is needed. We will update this page as soon as new developments arise.
The draft published on 30 January is the next step following the provisional agreement on the CSDDD that was reached between the EU Council and Parliament on 14 December 2023. This deal is a key milestone in having companies contribute to environment and human rights preservation. It marks a significant development as companies will be responsible for potential abuses in their value chain. The below summarises the highlights of the provisional agreement. We will share our views on the latest version of the CSDDD shortly.
The CSDDD will impose obligations for in-scope companies to mitigate their negative impacts on human rights and the environment. They will have to integrate due diligence into their policies and risk management systems, including descriptions of their approach, processes and codes of conduct. The directive now needs to be endorsed and formally adopted by both institutions, and is expected to enter into force in three to four years’ time.
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1. Large companies have to put in place climate transition plans with concrete targets and actions to mitigate climate change in line with the Paris Agreement
The provisional agreement fixes the scope of the CSDDD on large European companies with over 500 employees and a net worldwide turnover of EUR 150 million. For non-EU companies it will apply if they have a EUR 300 million net turnover generated in the EU, three years from the entry into force of the directive. The obligations will also apply to companies with over 250 employees and a turnover of more than EUR 40 million if at least 20 million are generated in a ‘high-risk sector'. The Commission will have to publish a list of non-EU companies that fall within the scope of the directive.
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2. The obligations will be enforced through administrative supervision, sanctions and specific civil liability rules
Each EU country has to designate a supervisory authority to monitor whether companies are complying with the obligations. These authorities will cooperate at EU level within the European Network of Supervisory Authorities established by the Commission. Sanctions on non-compliant companies include fines of up to 5% of their net worldwide turnover, ‘naming and shaming’ and ad hoc civil liability rules with trade unions and civil society organisations being entitled to bring claims.
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3. The financial sector will be temporarily excluded from the scope of the CSDDD with regards to due diligence of their clients
Under the agreement, the financial sector will be temporarily excluded from the scope of the directive with regard to due diligence of their clients. Banks, pension funds, insurers and investment firms will only be in scope for their own operations and the upstream supply chain. They will also have to put in place climate change transition plans, and adopt appropriate renumeration schemes. There will be a review clause for a possible future inclusion of this sector based on a sufficient impact assessment.
Other notable changes to the Commission proposal include that the mandatory climate plan must align with the European climate neutrality targets, including fossil fuel-related exposures. Among others, the plan should contain time-bound reduction targets in five-year steps from 2030 to 2050 for the company’s scope 1, 2 and 3 emissions. The disclosure requirements of the CSDDD will be aligned with the CSRD and disclosures will need to be accessible through the European Single Access Point (ESAP). National supervisory authorities will be able to impose a minimum maximum penalty payment of 5% of the company’s net worldwide turnover if CSDDD provisions are violated.The provisional agreement also specifies the civil liability rules, for instance setting a minimum limitation period of five years and adding that companies can be held liable if they ‘intentionally or negligently’ failed to prevent, mitigate or end an adverse impact as listed in Annex I. The provisions on directors’ duty of care were deleted. A vote on the final text is expected in April 2024 and we expect the directive to enter into force in three to four years’ time.
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Follow-up steps
By embedding ESG in corporate governance, identifying sensitive areas in the company's activities and preparing for possible changes in the chain, companies can get a handle on the new rules and mitigate litigation risks. More specifically, we advise companies in scope to anticipate the new rules by conducting a gap and risk analysis against the existing OECD Guidelines. We will be happy to engage with you to discuss your preparations for the CSDDD and related legislation such as the CSRD.
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