The European Parliament approves its position on the Directive on Corporate Sustainability Due Diligence

European Union - 06 / 07 / 2023

With this vote, the European Parliament has taken another step in the approval of the Due Diligence Directive (known by the acronyms CS3D/CSDD), aim of which is to ensure that companies operating in the internal market adopt measures to identify, prevent, mitigate, bring to an end and remedy the adverse human rights and environmental impacts of their activities, as well as those of their subsidiaries or value chains.

On June 1, 2023, the European Parliament approved the amendments put forward on the proposal for a Directive on Corporate Sustainability Due Diligence drawn up by the European Commission, thereby establishing its position in the process for the adoption of the legislation.

The difficulty of the subject matter is brought to light by the numerous amendments that have been approved with respect to most of its seventy recitals, thirty articles and annexes. The amendments extensively address such diverse issues as the content and form of the contractual clauses to be agreed with the business partners who make up the value chain, corrective measures to be implemented, the characteristics of whistleblowing channels, how consultation with stakeholders should take place, the content of the plan to ensure that the company’s model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C, among others.

We highlight some of the key features of the approved amendments below:

As regards the scope of application, the criteria for determining it is still based on the number of employees and worldwide net turnover of companies in the European Union, as well as on the net turnover generated in the Union in the case of non-EU companies.

However, on this point the amendments proposed by the European Parliament modify the scope of application of the directive substantially, by establishing that the new obligations will apply to EU companies with more than 250 employees and worldwide net turnover exceeding €40 million and to companies that do not reach these thresholds but are the ultimate parent company of a group that has 500 employees and a net worldwide turnover of more than €150 million. As for non-EU companies, those which have net worldwide turnover of more than €150 million and have generated at least €40 million generated in the European Union, will be included.

In this respect, we should recall that, as we detailed in our alert on March 1, 2022, the scope of application of the European Commission’s proposal only included companies with 500 employees on average and a worldwide net turnover exceeding €150 million, or those which, without reaching these thresholds, had 250 employees on average, worldwide net turnover exceeding €40 million and, moreover, had generated at least 50% of such turnover in one or more of the so-called high-impact sectors. As regards third-country companies, those whose net turnover in the European Union exceeded the above-mentioned thresholds were included.
In line with the position of the European Council, made public at the end of 2022, a provision that permits some due diligence obligations to be fulfilled at group level is introduced.
The Parliament deletes article 26 of the text proposed by the European Commission, which established that directors were responsible for putting in place and overseeing due diligence actions and in particular the due diligence policy, and for adapting the corporate strategy to take into account any adverse impacts identified.

Article 25, which requires directors to bear in mind the consequences of their decisions for sustainability matters, remains in place for now; and an amendment is included in article 15(3) to stipulate that directors are responsible for overseeing the obligation to establish a plan to ensure that their business model and strategy are aligned with the objectives of the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement, as well as the other obligations laid down in said article 15.
Regarding the measures to be implemented, disengagement is established as a last resort, that is, for prevention and mitigation as well as bringing to an end and minimization of adverse effects, the termination of business relations with the value chain business partner should be the last resort, continuous engagement between the parties being preferred. It is expressly envisaged that where a company considers disengagement as a measure to be implemented, it should assess whether its adverse impact would be greater than the adverse impact which the company intends to bring to an end or mitigate (so-called “responsible disengagement”).
As part of the transparency obligations, a provision is included requiring supervisory authorities to publish and regularly update a list of the companies subject to the directive under their jurisdiction, with links to access the companies' due diligence statements where applicable.
The criteria for imposing penalties are described and include taking due account of the company’s efforts to comply with remedial action, any investments made, any collaboration with other entities to address the adverse effects, the seriousness and duration of the adverse effects that have arisen, penalties imposed in other Member States, etc. The maximum limit of pecuniary sanctions shall be not less than 5% of the company’s net worldwide turnover.

The legislative procedure for the final approval of the directive will now move forward with the interinstitutional negotiations, which will eventually result in the adoption of a text.