Clifford Chance

Key elements of the Council's text seem unlikely to gain support from MEPs. Ultimately a compromise needs to be found between Council and Parliament for the Directive to be adopted.

Background

On 23 February 2022, the European Commission published the text for a proposed Directive on corporate sustainability due diligence ("CS3D"), see our briefing.

The CS3D would require large companies to carry out due diligence to identify and address the adverse human rights and environmental impacts of their operations, subsidiaries and value chains, and produce climate plans to meet objectives of the Paris Agreement.

The CS3D forms part of a wider European Green Deal, which commits the EU to climate neutrality by 2050. The CS3D will interact with the Corporate Sustainability Reporting Directive (the "CSRD"), which came into effect on 5 January 2023. The CSRD will cover the public reporting element of the due diligence duty of most companies that fall under the scope of the CS3D (see our briefing on the original CSRD proposal).

The text of the proposed CS3D is in the process of being considered by the EU's co-legislators: the European Parliament and Council of the EU.

On 1 December 2022, after extensive negotiation, the Council agreed its negotiating position (the "General Approach") for deliberations with the Parliament.

Prior to this, on 7 November 2022, the Parliament's Committee on Legal Affairs, responsible for Parliament's negotiations on the CS3D, had published its draft report by Lara Wolters MEP (the "draft Wolters Report"). Though by no means representative of a final position from the Parliament, the progressive intent of the document foreshadows a protracted debate between conservative and progressive elements in the Parliament and suggests there may be significant areas of contention between the Parliament and Council before a common position can be agreed.

Changes to the Commission's original proposed text

The General Approach represents a compromise between Member States following a number of drafts, and includes some key changes to the Commission's proposal:

Chain of activities v. value chain - narrower scope

The General Approach changed the scope of the due diligence obligations in the proposed CS3D from a full life-cycle concept of the "value chain" of a company to a more limited "chain of activities". This new term focuses on a company's upstream and downstream supply chain, including distribution, and expressly excludes the use of a company's products by its consumers.

The draft Wolters Report's prefers the "whole value chain approach", suggesting a significant point of contention between the two institutions.

Who is covered – changes in scope and deadlines

The General Approach reflects the Commission's proposed CS3D thresholds on the size of companies covered, with minor changes.

The draft Wolters Report, however, proposes to bring more companies within the scope of the proposed CS3D. For EU companies, the requirements would be as follows:

The "high impact sectors" in the Commission and General Approach drafts are, broadly, the fashion and textiles, food and agriculture, and mineral extraction sectors. The draft Wolters Report adds the energy, construction, financial services and technology sectors to this list.

For all of the proposals, non-EU companies would also be in scope if their net turnover within the EU is within the figures for worldwide turnover set out for EU companies. Employee numbers are not relevant.

Directors' Duties?

The provisions of the Commission's CS3D proposal imposing duties on directors have been dropped from the General Approach, as has the proposal to link directors' remuneration to setting climate plans.

Conversely, the draft Wolters Report propounds retaining and strengthening these provisions.

Civil liability?

The General Approach clarifies the civil liability component for in-scope companies. A company would be liable for damage caused to a natural or legal person by its intentional or negligent failure to comply with relevant due diligence obligations under the CS3D.

The draft Wolters Report contemplates broader civil liability, favouring strict liability, and widening potential liability to include parent companies of subsidiaries causing or contributing to an adverse impact.

Financial services?

Under the Commission's proposal, financial services would be within scope of the due diligence obligations of relevant companies.

In contrast, the General Approach leaves it to each Member State to decide whether to include financial services within the definition of "chain of activities" when transposing the CS3D into national law. This approach has come under criticism for undermining a core function of EU Directives in creating a harmonised approach among EU Member States.

Next steps in legislative process

The Council must now wait for the Parliament to reach an agreed position before the two institutions negotiate a final text.

The internal debate in Parliament is still live, and the likelihood of an agreement between Parliament and Council ahead of the European Parliament elections in spring 2024 has become an open question in Brussels.

If agreed, the text will then be translated into the official languages of the EU and published in the Official Journal.

The CS3D would come into effect shortly after its publication in the Official Journal. Member States would then have two years to transpose it into national legislation.