Progress on the Due Diligence Directive

On March 19, the European Parliament’s Committee on Legal Affairs (JURI) approved the text of the Corporate Sustainability Due Diligence Directive Proposal ("CS3D" or the "Proposal"), which had already been confirmed on March 15, 2024, by Coreper, the Council's main preparatory body.

Context

The Proposal is the result of a legislative process initiated two years ago by the European Commission —see Post | Towards a legislation on mandatory corporate due diligence and corporate accountability in the European Union (in Spanish)—. It establishes the duty of companies to prevent, mitigate, correct and remedy adverse impacts on the environment and on human rights resulting from their own operations, those of their subsidiaries, and those carried out by their business partners in their chains of activities.

Following several weeks of intense negotiations between European Council representatives, the approval of the Proposal paves the way for the full adoption of the CS3D, which will improve rules on taxonomy, transparency and accountability in ESG matters —see Legal Flash | New developments in green taxonomy and Legal Flash | Corporate information on sustainability: CSRD Directive (both in Spanish)—.

Significant elements and main developments of the Proposal

In general terms, the two most significant developments in the European Commission’s Proposal are the reduction of its scope of application and the extension of its entry into force and implementation.

Subjective scope of application

• General reduction of the scope
  
  The subjective scope has been reduced considerably with regard to the European Commission’s Proposal:
• The CS3D rules apply directly to companies incorporated in the EU with (i) over 1000 employees, and (ii) a net worldwide annual turnover of more than €450 million, and companies incorporated outside the EU that generated a net turnover in the EU of more than €450 million.
• Companies in certain high-risk sectors are no longer subject to a special regime, although the adopted text provides for a review of the sectoral approach for these sectors at a later stage.

The reduction of the subjective scope of application does not prevent companies with thresholds below those set out in the Proposal from also having to implement risk management systems to monitor impacts on human rights and the environment. Specifically, companies required to draw up a sustainability report in accordance with the Corporate Sustainability Reporting Directive (CSRD) must report on these management systems addressing the risks identified as significant in the double materiality analysis imposed under these rules.

• Chain of activities
  
  The due diligence rules on chain of activities (previously called "value chain") apply to the company’s upstream chain of activities (direct or indirect) and downstream chain of activities. The latter are now limited to the distribution, transport, and storage activities (waste management is now excluded) directly engaged by the company, other than those subject to national export controls in EU Member States.
  
  The chain of activities due diligence will require a review of the purchasing and supply policies and strategies, and of companies’ commercial terms with their business partners. This means that it will not be sufficient for agreements with suppliers to include unilateral guarantee clauses whereby the responsibility to respect the environment and human rights is conferred on the business partner. The new text continues to provide support to SMEs in the chain of activities.
  
  
• Financial sector
  
  

  The Proposal does not contain a separate (broader) due diligence regime for the financial sector that was expected to be included in the Commission’s version. However, it includes a review clause providing that, within two years, the Commission must report on the need to establish additional due diligence requirements for this sector.

  For regulated financial entities, the definition of "chain of activities" applies only upstream and does not include downstream business partners receiving these entities’ services.

Material scope

No significant amendments have been made to the material scope in which corporate due diligence is to be used. It covers all human rights and all environmental categories (climate change; loss of biodiversity; contamination; degradation of ecosystems; deforestation; overexploitation of materials, energy and natural resources; and the harmful generation and mismanagement of waste). It maintains the obligation to have a transitional climate change mitigation plan consistent with the Paris Agreement.

It also maintains the risk approach. The identification and assessment of risks causing adverse impacts will be a key factor as regards the fulfillment of the company’s obligation on which to set up an adequate system to prevent, mitigate, correct and repair any damage. This is particularly relevant because the due diligence obligation is enforceable regarding risks the company has identified, and also those it should have identified.

Other developments of interest

• Directors
  
  All references to directors have been removed, both concerning due diligence obligations and those related to linking the climate change obligation to directors’ remuneration. Thus, directors’ obligations and remuneration will be regulated under the internal rules of each Member State.
  
  
• Compliance monitoring system
  
  The government authorities will continue to be in charge of the compliance monitoring system through specialized entities with powers of investigation, of establishing precautionary measures and of imposing penalties.
  
  In the case of access to justice, if a breach involving damages occurs, the CS3D limits the possibility of trade unions and civil society or consumer organizations to bring legal action where victims state their wish for representation.

Transposition and implementation terms

The agreed text also provides for longer phasing-in periods of application: (i) three years from the entry into force of CS3D for EU companies with 5,000 employees and a net worldwide turnover of €1,500 million or more, and for non-EU companies that meet the business-volume threshold in the European market; (ii) four years for EU companies with no more than 3,000 employees and an annual billing volume of no more than €900 million, and for non-EU companies that meet the business-volume threshold in the European market; and (iii) five years for all other companies.

Next steps

The Proposal will now be revised and translated by lawyer-linguists, and is expected to be approved in the plenary of the European Parliament of April 24, which is the last month of its term of office.

As there is unlikely to be enough time to complete the translations by the end of this term, the text will have to be adopted following the procedure known as "correction of errors". In this case, the provisional voting of the English-language version would take place in the plenary of April 24, with the text being formally adopted in all official EU languages in September or October 2024. Publication in the Official Journal will occur toward the end of the year (November/December 2024), coming into force 20 days later.