EU: Update on Corporate Sustainability

EU Parliament votes in favor of corporate human rights and environmental due diligence rules

Why should I read this?

On 1 June 2023, the EU Parliament agreed its negotiating position on the EU Commission’s proposed Corporate Sustainability Due Diligence Directive (CSDD). The version passed by the EU Parliament will now be reconciled with those being considered by the EU Council and the EU Commission, before a final text on the legislation is produced later this year.

Once in force the new rules will require in-scope companies to identify and address the negative impacts of their activities and “value chains” on human rights and the environment (e.g. child labor, slavery, labor exploitation, pollution, environmental degradation, loss of biodiversity), as well as a new requirement to adopt and implement climate transition plans.

As a result, more companies (including those located outside the EU but with operations in the EU) will have to collect and share sustainability data. In-scope companies need to plan ahead as to how they will obtain the necessary data to satisfy the new reporting requirements. The extensive due diligence requirements would necessitate leadership, training, resourcing, investment, procurement changes to procurement processes and contracts, as well as capability-building. As a minimum, the Directive seeks to curtail the practice of adding contractual assurances in supply chain contracts without further action, and it seeks to increase corporate liability.

What has changed

The most significant changes adopted by the EU Parliament, when compared to the proposal agreed by the EU Commission, include:

• a requirement for companies to adopt and implement climate transition plans that are aligned with the Paris Agreement’s objective of limiting global warming to 1.5˚C and encompassing Scope 1, 2 and 3 emissions
• a requirement for companies with more than 1,000 employees to tie performance on the climate transition targets to directors’ variable compensation
• creation of a grievance mechanism at an operational level that can be used by persons or organizations to raise grievances and request remediation
• sanctions and supervisory mechanisms for companies that fail to comply, which could include having the company’s goods taken off the market, the imposition of fines as high as 5% of the company’s global revenues, or, for non-EU companies, bans from public procurement in the EU
• a broader application of the CSDD (than that proposed by the EU Council) by including financial services institutions (banks, insurers and asset managers), and not leaving this to the discretion of the EU Member States.

What happens next

The version of the draft Directive passed by the EU Parliament will now be reconciled with those drafts being considered by the EU Council and the EU Commission, before a final text on the legislation is produced later this year.

It is anticipated that the rules will start to apply between 2024-2028, however given the significant impact on complex supply chains, companies would be well advised to kick-off their CSDD compliance programs well before the rules come into force.

Further reading on the CSDD

EU CSDD Directive - Jan 2023

EU Corporate Sustainability Due Diligence law would apply to non-EU companies