The Council’s position includes a number of differences from the European Commission’s original proposal, including in relation to the requirement to diligence the broader value chain.
By Paul A. Davies, Michael D. Green, and James Bee
On 30 November 2022, the European Council (the Council) — which comprises the views of the EU Member State governments — adopted its negotiating position on the EU’s proposed Corporate Sustainability Due Diligence Directive (CSDDD). The CSDDD would require large companies operating in the EU to undertake due diligence on their own activities and that of their suppliers, and to identify, mitigate, or avoid any actual or potential adverse impacts of their business operations. The CSDDD would also set out any penalties (including possible civil liability) in relation to the breach of such obligations.
The Council’s adoption of its position marks the latest step in relation to supply chain due diligence-related laws in the EU. The CSDDD itself was initially proposed by the European Commission in February 2022 (the Commission Proposal). The Commission Proposal followed a March 2022 European Parliament resolution for a legislative initiative on corporate due diligence, which expressed support for the adoption of binding legislation at EU level in relation to companies’ due diligence obligations. In addition, a number of EU Member States (notably France and Germany) have passed laws covering similar issues over recent years, reflecting the growing importance of these issues for legislators in the EU.
Highlights of the Previous Commission Proposal
As discussed in a previous blog post on the CSDDD, the Commission Proposal would have applied to large companies, both those based in the EU and non-EU companies that generate large amounts of revenue in the EU (see table below for thresholds).
The Commission Proposal would have required in-scope companies to undertake diligence on their operations and those of their value chains, and publicly identify “actual and potential” adverse impacts on the environment and/or human rights of the operations of such operations. Please see the aforementioned blog post for further details of the substantive requirements of the Commission Proposal.
Noteworthy Changes in the Council’s Proposal
While reflecting many of the requirements of the Commission Proposal, the Council’s adopted negotiated position on the CSDDD contains some noteworthy proposed amendments, including:
- Scope — While the general size thresholds from the Commission Proposal are retained, the Council has introduced a phase-in period. The CSDDD would therefore first apply to companies with more than 1,000 employees and €300 million net worldwide turnover (or non-EU companies with €300 million turnover in the EU), before applying to other in-scope companies at a later stage.
- Chain of activities — The term “value chain” within the Commission Proposal has been replaced by the concept of “chain of activities” in the Council’s position. Chain of activities in this context has a narrower 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 entirely. This concept would significantly reduce obligations for many in-scope companies compared to the Commission Proposal.
- Approach to financial undertakings — Unlike the Commission Proposal, the Council’s position would make the applicability of the CSDDD to financial services optional, such that Member States would be able to decide when implementing the CSDDD into national law whether financial services would be within scope.
- Transition Plan — The requirement to prepare a 1.5℃-aligned transition plan that was included in the Commission Proposal has been aligned with the analogous reporting requirements in the EU’s upcoming Corporate Sustainability Reporting Directive (CSRD) (please see this Global ELR blog post for more information on the CSRD), including the requirement (included in the CSRD) to disclose exposure to coal-, oil- and gas-related activities..
The Council’s initial negotiating position will form the basis for upcoming negotiations with the European Parliament on the final terms of the CSDDD. The European Parliament is currently undergoing internal discussions at committee level (led by the Committee on Legal Affairs), and the European Parliament will then vote and determine its initial negotiating position on the results of those discussions. The Council expects the European Parliament to eventually adopt its initial negotiating position in May 2023, after which formal inter-institutional negotiations will commence.
Latham & Watkins will continue to monitor developments in relation to the CSDDD and other legal initiatives relating to supply chain due diligence both in the EU and globally.