EU Parliament and Council reach political agreement on CS3D

The Council of the EU and the European Parliament reached a provisional agreement on the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) on 14 December 2023. The agreed text is not yet available so this briefing is based on the Commission, Council and Parliament press releases. The agreed text needs to be endorsed and formally adopted by both the Parliament and the Council and then published in the Official Journal (OJ) of the EU. The Directive will enter into force 20 days after publication in the OJ. Member states will have 2 years to implement the CS3D in national law.

The CS3D will require in-scope companies to conduct human rights and environmental due diligence across the whole of their business (including any subsidiaries) and any value chains. It will also require certain in-scope companies to produce climate transition plans (TPs) (for background on the Commission's proposal and the Council and Parliament's negotiating positions, see The Corporate Sustainability Due Diligence Directive proposal (ashurst.com).

The main elements of the Parliament and Council's agreement are set out below.

• Scope. Although the descriptions of the scope of the CS3D vary across the three press releases, the table below sets out the EU and non-EU entities that we understand are now in-scope:
  

Group 1 non-EU companies now have a longer lead time before they need to comply (3 years instead of the 2 years in the Commission's original proposal). The Council's press release states that the Commission will need to publish a list of non-EU companies that fall under the scope of the Directive.

The Commission's press release states that SMEs are not within the scope of the Directive but it recognises that SME's that are business partners of in-scope entities will be affected by the due diligence that such in-scope entities are required to do on their value chains. The Commission notes that accompanying measures will provide support to in-scope entities and SMEs that are indirectly affected. This support includes financial support and the provision of model contract clauses.

• Temporary exclusion of the financial sector. In a concession to the Council, the provision of financial services will initially be excluded from the scope of the Directive, but downstream financial services could be included in the future depending on the outcome of an impact assessment to be required by a review clause. Financial services firms will have to adopt and put into effect a TP. Like SMEs, financial sector firms will be affected by the CS3D where they are business partners of an in-scope entity.

• Climate transition plans. Group 1 in-scope companies, including financial sector firms, will have to adopt and put into effect a TP ensuring their business model and strategy are compatible with the 1.5C Paris Agreement goal. The Council's press release states that the provisions relating to TPs have been strengthened, while the Parliament's press release states that MEPs have ensured that the management of companies with over 1 000 employees will receive financial benefits for implementing a TP.

• Clarifying the adverse human rights and environmental impacts that must be considered and prevented through the due diligence duty. The draft Directive includes a list at Annex 1 of the rights and prohibitions that, when abused or violated, constitute an adverse human rights impact. The list references international instruments that have been ratified by all member states and that set clear standards that can be observed by companies. The agreement adds new elements to the obligations and instruments listed concerning human rights, particularly for vulnerable groups. References in the revised text, once available, will include the International Covenant on Civil and Political Rights, the International Covenant on Economic, Social and Cultural Rights and the Convention on the Rights of the Child. The Core International Labour Organisation (ILO) Conventions may also be added to the list by delegated legislation once they have been ratified by all member states. The agreement also clarifies the nature of environmental impacts covered by the CS3D as including any measurable environmental degradation, such as harmful soil change, water or air pollution, harmful emissions or excessive water consumption or other impacts on natural resources.

• Civil liability for human rights violations or environmental damage. The Council's press release states that the agreement strengthens the provisions on access to justice. Affected persons that have suffered damage caused by a company's failure to conduct the appropriate due diligence and prevent, mitigate or end the adverse impacts identified by that due diligence, and those concerned about the adverse environmental or human rights impacts of a company (e.g. trade unions or civil society organisations) will have five years to bring a claim. The agreement also limits the disclosure of evidence, injunctive measures, and the cost of the proceedings for claimants. Companies that identify adverse impacts on the environment or human rights caused by their business partners will have to end those business relationships when those impacts cannot be prevented or ended.

• Enforcement and penalties. A supervisory authority in each member state will be able to investigate suspected breaches and impose penalties on non-compliant companies, including “naming and shaming” and (in a win for the Parliament) levying fines of up to 5% of net worldwide turnover. Supervisory authorities will have to cooperate with the European Network of Supervisory Authorities established by the Commission. The agreement also provides for the possible imposition of injunctions where companies fail to pay fines.

• Public Procurement. The agreement provides that compliance with the CS3D could be a criterion for the award of public contracts and concessions.
  

It is not clear from the press releases whether some of the other negotiating points put forward by the Council and Parliament have been agreed. These include provisions on directors’ duty of care concerning human rights, climate and environmental consequences, and how the obligations under the Directive including for adopting TPs align with requirements under the Corporate Sustainability Reporting Directive (for more detail on the Council and Parliament negotiating positions, see The Corporate Sustainability Reporting Directive - An overview (ashurst.com). We will issue a further briefing once the revised text of the Directive is available to clarify how these points have been dealt with.