CSDDD clears late hurdle but with watered down terms

Businesses in scope of the CSDDD face obligations review their own operations, and those of their business partners in their supply chains, to identify potential adverse impacts on human and environmental rights. They would also be required to update their policies, procedures and systems and review and amend existing contracts with parties in the supply chain.

The Belgian presidency of the Council of Ministers confirmed on Friday that members of the Council’s Permanent Representatives Committee (Coreper) had approved the CSDDD, describing the directive as one that “fosters sustainable and responsible corporate behaviour, [and] anchors human rights and environmental considerations for companies' operations”.

The approval comes despite opposition to the CSDDD from some EU member states, including Germany. Germany already has enacted a Supply Chain Due Diligence Act (SCDDA) which contains similar obligations to those envisaged under the CSDDD.

The CSDDD was formally proposed by the European Commission in 2022. It has since been subject to intense scrutiny and debate by the EU’s two main law-making bodies, the European Parliament and the Council of Ministers. Both institutions must agree on, and formally vote to adopt, the wording of the text for the legislation to become EU law.

In late 2023, the Parliament and Council announced that they had reached a provisional agreement on the CSDDD. However, not all EU member states support the proposals. At one stage, it looked like there would be insufficient support for the legislative file to obtain the endorsement of Coreper – a key stage in the law making process – with the Belgian presidency of the Council failing to win sufficient consensus for amended proposals last month. However, the Belgian presidency prepared further amendments last week and these have now been approved by Coreper, despite opposition from Austria and Malta, and a number of countries, including Germany, abstaining. Coreper’s approval paves the way for the revised CSDDD to be put before the European Parliament for its final approval.

Though the text that has been approved by Coreper is not publicly available yet, reports by several media outlets, including Euractiv, Forbes, the Irish Times, and Faz provide an insight into some of the main differences between the original text proposed by the Commission and the text approved by Coreper. Some of the revisions made are to the scope of the CSDDD.

Initially, the Commission had proposed that all businesses with at least 500 employees and a turnover of €150 million or more should be subject to the CSDDD. However, the amendments approved by Coreper mean that only businesses with at least 1,000 employees and annual sales of €450 million will now be in scope of the rules.

Under a new staged approach to the application of the CSDDD, companies with more than 5,000 employees and €1.5 billion in annual turnover will be subject to the rules three years after they come into force; companies with more than 3,000 employees and €900m turnover will be subject to the rules four years after they come into force; and companies with more than 1,000 employees and €450m turnover will have five years to prepare before the rules take effect for them.

Further plans that the Council and Parliament had provisionally agreed on, which would have extended the rules to businesses in certain sectors, like textiles, agriculture and extraction of minerals, under lower thresholds, have been scrapped entirely, though they could be revived under a review clause in the draft legislation.

Rules regarding supply chain due diligence have also been narrowed in scope after Coreper approved amendments that will extend the requirements to relationships companies have with business partners who carry out activities for the company or on behalf of the company, and not to others that have only an indirect relationship with the business.

Proposals that would have required businesses to tie directors’ remuneration to the company’s plans for addressing climate risk, have also been dropped.

Public policy expert Mark Ferguson of Pinsent Masons said: “The vote by EU ambassadors brings to an end an intensely political debate over the future of supply chain oversight; the final Directive will lead to far fewer companies being captured than initially planned when the legislation was proposed; next step is for the European Parliament to approve the final text.”

Laura Ayre, an expert in supply chain resilience at Pinsent Masons, said: “Despite the relaxation for smaller businesses, those caught up in the supply chain of bigger businesses in-scope of CSDDD will still need to comply with the requirements as if they were subject to the rules directly, as the obligations will flow down through the supply chains.”

Corporate compliance expert Eike W. Grunert of Pinsent Masons said: “Despite the long implementation periods under the staged approach, lessons learned from the German Supply Chain Act teach us that businesses that will be directly, or indirectly, in scope should plan ahead, and look into the relevant topics in necessary detail well in advance.”