EU Corporate Sustainability Due Diligence Directive – Start of the Trilogue

The European Union wants to promote sustainable and responsible corporate behaviour. The basis for this is the draft of the EU Commission (COM) for a "Directive of the European Parliament and of the Council on corporate sustainability due diligence and amendments to Directive (U) 2019/1937" published in February 2022. The regultion aims to give greater consideration to human rights and the environment in all value chains - both inside and outside the EU.

Since then, the two co-EU legislators, the Council and the European Parliament (EP), have been discussing their position on the Commission text intensively and under strong political pressure. The declared aim is to conclude the legislative process by the end of 2023, if possible, and thus before the EP elections in 2024.

The position of the Council

In December 2022, the Council of the European Union adopted in a rush a so-called General Approach, a political agreement on essential cornerstones of the proposal. The business community had previously communicated its clear criticism of the EU Commission's proposal several times. Since many member states did not yet have a final position on all points, no agreement could be found in the Council until the very end. In the end, the German government agreed to the General Approach, as the political pressure for agreement at the EU level was very high when however only with reservations,.

The key points of the General Approach at a glance:

• Scope of application: Introduction of the concept of the so-called activity chain as a compromise on the question of whether the scope of application should include the value chain or the supply chain.
• Thresholds as in the COM proposal: The directive is to apply to companies with more than 500 employees and at least 150 million euros in annual turnover; in so-called risk sectors for companies with more than 250 employees and at least 40 million euros in annual turnover.
• Company law: In contrast to the COM proposal, the provisions on directors' due diligence and monitoring (Articles 25 and 26) are deleted, as are the provisions on directors' remuneration in relation to climate change mitigation (Article 15(3)).
• Civil liability: The breach of duty must have been intentional or negligent and the standard concerned must aim at protecting natural or legal persons. A company cannot be held liable if a business partner in its chain of activities caused the damage. Over-compensation (in particular punitive damages and multiple compensation) is excluded. Stricter national or European liability remains possible.

The position of the European Parliament

The EP plenary voted on the EU Supply Chain Directive in June 2023, setting its position for the upcoming inter-institutional negotiations. 366 MEPs voted in favour of the Directive, 225 MEPs voted against and 38 MEPs abstained. Already in April 2023, the lead Committee on Legal Affairs (JURI) of the EP had voted on its report and adopted all amendments contained.

The key points of the EP position at a glance:

• Overall: aggravating of the Commission text.
• Expanded scope: activities throughout the value chain that have caused, contributed to or are directly related to negative human rights or environmental impacts; broad definition of value chain in Article 3g compared to COM and Council.
• Reduced thresholds: all companies with more than 250 employees (instead of 500 in the COM proposal) and a turnover of €40 million (instead of €150 million in the COM proposal); no specific rules for risk sectors.
• Company law, as in the COM proposal: Due diligence obligations of the members of the company management to take into account the short-, medium- and long-term consequences of their decisions for sustainability aspects, together with liability for breaches of these obligations (Article 25).
• New: Article 3a introduces an internal market clause obliging Member States to coordinate in the implementation of the Directive; furthermore, six years after the entry into force of the Directive, it is to be reviewed whether the Directive will be converted into a Regulation.
• Article 15(1) and (2): Extension of climate protection targets (1.5 degree climate target, climate neutrality target 2050, climate targets 2030); introduction of a so-called transition plan of a company to comply with the climate protection targets with detailed and extensive requirements on its contents.
• Article 15(3) tightens the responsibility of management for compliance with climate protection targets; obligation of companies with more than 1,000 employees to tie part of the variable remuneration of management to the transition plan.
• Aggravating civil liability, Article 22: Include liability of a company for damage caused by a subsidiary; introduce a limitation period of at least ten years for actions for damages; obligation to keep legal costs low; introduce the right of NGOs to bring actions in court on behalf of victims.
• Introduction of a risk-based approach, Article 3(1q).

The BDI assessment

The EU institutions involved in the CSDD seem to lack a sense of proportion for the competitiveness of European companies in the crisis and the strategically necessary diversification of supply chains. With this directive, the EU risks a massive impairment of the necessary transformation of its industries. It jeopardises the development of alternative and resilient value chains and thus the security of supply of the economy and society. Instead of facilitating access to new sources of supply and expanding them in number, the directive makes the important diversification of supply chains significantly more difficult, including in high-risk countries. It fails to achieve the common goal of politics and business of reducing existing dependencies. This way, Europe will not be able to keep up in the geopolitical competition.

Respect for human rights and the protection of our environment are concerns that unite politics and business. In view of the magnitude of the challenge, it is wrong to shift the responsibility for the protection of human rights and the environment solely onto companies in this form. They want sustainability in their supply chains and are already doing what they can to live up to their responsibility. In addition, Germany's partner countries perceive the regulations as protectionist. It is more reasonable to empower suppliers from partner countries through development policy measures.

None of the positions agreed upon so far meets the expectations of the business community. In comparison with the positions of the Commission and the EP, the Council's position in the form of the General Approach in conjunction with the German Protocol Declaration represents the most practicable solution for businesses. Whether it will be maintained or changed during the trilogue negotiations is currently questionable.

Outlook

The trilogue negotiations began in June 2023 under the Swedish Council Presidency and are continuing from July 2023 under the Spanish Council Presidency. The three EU institutions want to agree on the final text by the end of 2023 at the latest.