Clifford Chance

Despite last-minute negotiations threatening to derail the vote, Parliament adopted its position on the CS3D on 1 June, allowing trilogue negotiations with the European Commission and Council to begin.

The European Commission proposed a new Directive on Corporate Sustainability Due Diligence in February 2022 which would, among other things, require in-scope businesses operating in the European market to undertake human rights and environmental due diligence in relation to their operations and value chains. In December 2022, the Council of the European Union adopted its negotiating position.

In April 2023, the Legal Affairs Committee of the European Parliament (JURI) adopted a series of amendments to the Commission's original proposal presaging much of the Parliament's final negotiating position, which was adopted in Plenary with 366 votes in favour, 225 votes against and 38 abstentions.

Below is an analysis of some of the key points that were approved. The full agreed text is not yet publicly available.

The position of the EPP

Despite the JURI draft having received broad political support, including within the centre right European People's Party (EPP), all of whose JURI members voted in favour, the group threatened to topple the text in the run-up to the 1 June vote.

The EPP argued that the new rules would overburden businesses and lead to a plethora of different laws across the EU because the Directive would allow Member States to go further if they so wished. In the end, however, the JURI draft was "broadly carried" (in the words of Lara Wolters MEP, the text's rapporteur).

Directors' implementation and oversight responsibilities removed but duty of care maintained (Articles 25 and 26)

Of the 50 or so amendments tabled for plenary by the EPP, only one was successful and will lead to the removal of Article 26, which was in the Commission's proposal, but was also removed by the Council.

The Article would have made directors of companies responsible for putting in place and overseeing the due diligence requirements set out in the CS3D, and adapting corporate strategy to take into account actual and potential adverse impacts on human rights and the environment.

Conversely, Article 25 was retained by the Parliament (having been removed by the Council). It imposes duties on directors of in-scope companies to take into account the consequences of their decisions on human rights, climate change and the environment, including in the short, medium and long term.

Further, for companies with over 1,000 employees, the Parliament text requires Member States to ensure that directors' variable remuneration is linked to metrics within the company's CS3D-mandated climate transition plan, and for this remuneration policy to be approved at companies' Annual General Meetings (AGMs). This increases the employee threshold for the same provision made by the Commission (which was set at 500), but would apply at a lower turnover figure of EUR 40 million (as opposed to the Commission's EUR 150 million threshold).

Spotlight on climate change

The Parliament's text would more closely align CS3D-required climate plans to the recently adopted Corporate Sustainability Reporting Directive (CSRD), while strengthening the plan even further.

For example, Parliament's text would require that a climate transition plan is not only adopted, but also implemented, a point that was left unclear in the Commission and Council positions.

The Parliament's suggested climate transition plan must also be aligned with limiting global warming to 1.5 °C, in line with the Paris Agreement (this is also the position of the Commission and Council), achieving net zero by 2050 (as the Council mandates), and also with the EU’s Climate Target Plan to cut greenhouse gas emissions by at least 55% by 2030. Carbon reduction targets must also, where appropriate, include absolute (rather than net) emission reduction targets.

Lara Wolters MEP stated in a press conference following the vote that the scope of the Parliament's CS3D text would require companies to consider scope 1, 2 and 3 emissions in their climate plans.

Scope of application

The Parliament voted to extend the scope of the CS3D to include smaller companies than proposed by the Commission. Companies with more than 250 employees and an annual turnover of EUR 40 million will be caught. Companies from non-EU countries will be in-scope if their turnover in the EU totals at least EUR 40 million and they have a global turnover of EUR 150 million. In effect, the Parliament is proposing to scrap the lower thresholds applicable only to companies in "high-impact sectors" in the Commission and Council texts (including in particular, the fashion and textiles, food and agriculture, and mineral extraction sectors) by widening the net to all companies which meet the above turnover threshold.

Sanctions, enforcement and access to justice

Following the vote, Lara Wolters MEP emphasised that the text "has teeth", by providing access to justice for victims. She pointed to the administrative and civil liabilities and sanctions agreed by the Parliament.

On sanctions for non-compliance, the Parliament text builds on the Commission's suggestion (with which the Council agreed) that sanctions be based on a company's net turnover, specifying an upper limit for sanctions at 5% of a company’s global net turnover.

The Parliament's clarification would provide some harmonisation over the maximum level of pecuniary sanctions across the various Member States.

In a press release following the vote, Wolters' Socialists and Democrats Party (S&D) also highlighted further developments in the final text, including civil society organisations' and trades unions' ability to represent victims in court, as well as courts' powers to demand disclosure from companies, and to issue injunctions against companies.

What are the next steps?

With the Parliament's position now adopted, the three institutions (Commission, Council and Parliament) can begin the trilogue negotiations in order to try and agree a final compromise text. This usually takes several months, but there is appetite to begin quickly, with the first three-way meeting scheduled for 8 June 2023.

The European Parliament elections will be held between 6 and 9 June 2024. If the institutions are unable to reach a compromise by that date, work on the CS3D will spill over to the next Parliament.