The EU Corporate Sustainability Due Diligence Directive

In our earlier Article, we discussed the initial CSDDD proposal (dated 23 February 2022) by the European Commission (the Commission). On 1 December 2022, the European Council (the Council) adopted its position (the Council Position) on the CSDDD proposal, constituting the Council’s starting position in negotiations on the CSDDD proposal with the European Parliament (the Parliament). In this blog, we highlight a few key deviations from the Commission’s draft, which may significantly affect the final text of the CSDDD. For more information on the proposed CSDDD we also refer to the special issue of Tijdschrift Ondernemingsrecht (free access here), with contributions of our colleagues Steven Hijink and Manuel Lokin.

At the end of this blog, we also highlight the latest developments regarding Dutch legislation in the Netherlands about human rights and environmental due diligence.

Scope

Under the initial CSDDD proposal, companies are in scope if they meet certain criteria based on the number of employees and the net worldwide turnover for EU companies, and on the net turnover generated in the EU for non-EU companies.

• EU limited liability companies:
  • Group 1: 500+ employees on average and a net worldwide turnover in excess of EUR 150 million in the last financial year.
  • Group 2: not in Group 1 but operating in high-risk sectors, with more than 250 employees and a net worldwide turnover in excess of EUR 40 million in the last financial year, provided that at least 50% of this net turnover was generated in one or more of the high-risk sectors.

• Non-EU limited liability companies active in the EU:
  • Group 1: with a net turnover in excess of EUR 150 million in the EU in the financial year preceding the last financial year.
  • Group 2: not in Group 1, but with a net turnover in excess of EUR 40 million, but not exceeding EUR 150 million, in the EU in the financial year preceding the last financial year, provided that at least 50% of this net worldwide turnover was generated in one or more of the high-risk sectors.

Under the Council Position, the CSDDD would apply as follows, assuming a broader transitional period for group 1 and group 2 companies:

• Very large companies with more than 1,000 employees and a worldwide net turnover of EUR 300 million (or non-EU companies with EUR 300 million turnover in the EU): within three years after the entry into force of the CSDDD;
   
• Group 1 companies four years from the entry into force of the CSDDD; and
   
• Group 2 companies five years from the entry into force of the CSDDD.

In addition, it is clarified that only companies that meet the criteria during two consecutive financial years fall within the scope of the CSDDD. Another important suggested change is to include the indication that the scoping criteria are assessed at an individual company level (not at a consolidated group level).

Finally, EU Member States will be able to decide themselves whether financial services should be within scope of the national law implementing the CSDDD. The Dutch government still advocates full inclusion of the financial sector in the CSDDD. Consequently, the Dutch government did not support the Council Position at the end of the negotiations.

Modification of due diligence obligations

The Council Position is committed to better alignment with the practices and rules of the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.  

From “established business relationship” to “business partner”

The initial CSDDD proposal limits due diligence for a company to conducting due diligence on its own operations, subsidiaries and business partners in an "established business relationship" in its value chain. The Council Position would prefer the definition of "business partner", because of the broader impact and scope of that term.

Risk-based approach

The Council Position places more emphasis on a risk-based approach by companies and prioritization of severe adverse impacts of the chain of activities. If it is not possible to address all the adverse impacts at the same time, companies must prioritise the adverse impacts based on their severity and likelihood and first address the most significant ones before moving on to the less significant ones.

From “value chain” to “chain of activities”

The term “value chain” contained in the Commission’s Proposal has been replaced by the more neutral term of “chain of activities”. Chain of activities in this context has a narrower and clearer meaning than value chain, as it focuses on a company’s suppliers and leaves out the uses of the company’s products or provision of its services. Interestingly, the Corporate Sustainability Reporting Directive (CSRD), which took effect on 5 January 2023, does link to the term value chain.

Due diligence obligations at group level

Lastly, the Council Positon introduces new provisions to allow some of the due diligence obligations to be met at group level under certain conditions.

Combating climate change

The obligation to prepare a transition plan remains, but the text has been aligned more closely with the reporting requirements under the CSRD. See for more information on the corporate climate transition plan the article of Manuel Lokin and Thomas Arons in Ondernemingsrecht 2023/35.

The provision that variable remuneration of directors must be linked to the achievement of the transition plan if ESG aspects are taken into account in the remuneration, has been dropped. The Council Position regards the form and structure of directors’ remuneration as matters primarily falling within the competence of the company and its relevant bodies or shareholders. However, we note that the disclosure requirements under the CSRD still prescribe the disclosure of information about the integration of the sustainability-related performance in incentive schemes.

Clarification of civil liability and compensation

Article 22 of the Commission’s proposal has been significantly amended in the Council Position to provide more clarity and to avoid interference with the EU Member States’ tort law systems. The four conditions that have to be met in order for a company to be held liable were clarified and the Council Position introduces the element of fault and the right of victims of human rights or environmental adverse impacts to full compensation.

Dropping directors' liabilities

For companies and its directors, one of the most controversial provisions of the initial CSDDD proposal are Articles 25 and 26. The provisions in the Commission’s proposal may trigger specific liability for directors regarding the human rights and environmental impacts of the companies and its due diligence process.

The Council, however, has deleted both provisions due to strong concerns expressed by EU Member States (including the Netherlands). It remains to be seen what the Parliament will decide on this subject, now that several committees of the Parliament advise to maintain these provisions.

Next steps for the CSDDD proposal

The CSDDD proposal still has some way to go before it becomes law and further (potentially significant) changes should be expected before the regulation is finalised. 

On 25 April 2023 the Parliament's Committee on Legal Affairs voted in favour of its amendments to the CSDDD proposal. It is seen as a strong indicator of the Parliament’s negotiating position on the CSDDD, which is to be expected at the end of May 2023. Once the whole of Parliament has agreed its official position, it will enter into negotiations with the Commission and the Council. Once the directive has been formally adopted, most likely not before 2024, EU Member States will have two years to transpose the CSDDD into domestic law.

Developments in (further) due diligence obligations in the Netherlands

In the Netherlands, there has been a lot of focus on human rights and environmental due diligence obligations of companies for some time now (not only because of the upcoming CSDDD).

The Netherlands already has a specific law relating to human rights due diligence: the Child Labour Due Diligence Act (Wet Zorgplicht Kinderabeid, WZK). The WZK introduces a hard due diligence obligation with regard to child labour for every company that sells goods or provides services to Dutch end users. However, the WZK, adopted by the Senate on 13 November 2019, has still not entered into force.

In addition, a Member’s Bill on International Corporate Social Responsibility (Dutch only) (Dutch DD Bill) is pending before the House of Representatives. The Dutch DD Bill is similar to the CSDDD but goes further in some respects. First, the Dutch DD Bill includes a general duty of care (due diligence) that applies to any Dutch legal entity that knows or can reasonably suspect that its own activity or that of its business relations may have adverse effects on human rights, labour rights or the environment in a country outside the Netherlands. Secondly, the Dutch DD Bill contains an obligation for certain large companies to exercise due diligence in their value chain, including the conduct of business relations of the company, such as suppliers, with an accompanying reporting requirement.

There has been much commotion about the Dutch DD Bill: in particular the scope and the enforcement mechanism (consisting of administrative, criminal and civil enforcement) are under discussion.

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