On 14 December 2023, the three European institutions reached a long-awaited agreement on the Corporate Sustainability Due Diligence Directive (CSDDD). While we await further details of the final text, we explain the contours of the CSDDD as follow from press releases and a joint press conference held on 14 December 2023. Once the final text becomes available, we will update you again.
In parallel to this European development, we also report on the Dutch Bill on Responsible and Sustainable International Business Conduct (RSIBC bill). Following a referral by the Standing Committee on Foreign Trade and Development Cooperation, the Dutch Council of State has issued advice on proposed amendments to the bill, which were published in September 2023. The initiators of the bill meanwhile issued a second memorandum of amendments to the bill in December 2023.
Key elements of CSDDD deal
Following the joint agreement on the CSDDD, several press releases were issued that do not present a consistent picture on all aspects. From the releases and a joint press conference held on 14 December 2023, the following picture emerges.
Once adopted, the CSDDD will apply to EU companies and EU parent companies with (i) more than 500 employees, and (ii) a worldwide turnover of more than EUR 150 million. The CSDDD will also apply to companies with (i) more than 250 employees, and (ii) a turnover of more than EUR 40 million euro, provided that at least EUR 20 million is generated in specific sectors, including manufacture and wholesale trade of textiles; clothing and footwear; agriculture; food production; and trade in raw agricultural materials.
Three years after it enters into force, the CSDDD will also apply to non-EU companies and non-EU parent companies with EUR 300 million turnover in the EU.
Due diligence obligation
In short, in-scope companies are required to conduct due diligence regarding actual and potential adverse impacts on certain environmental and human rights aspects. This extends to their value chain (which includes their upstream business partners and, in part, downstream activities, such as distribution or recycling). Companies that identify adverse environmental or adverse human rights impacts by a business partner will have to end the relationship with this partner if the impacts cannot be prevented or remedied.
The adverse impacts on the environment and human rights will be defined in the annexes to the CSDDD, which will be updated as a result of the negotiations.
Financial sector's due diligence obligations
The inclusion of the financial sector in the scope of the CSDDD has long been a stumbling block in the negotiations, but the EU institutions have now reached a compromise. Financial undertakings (the definition to be provided in the final text) only fall within the scope of the due diligence obligations to the extent that their own operations and those of their upstream business partners are concerned. The definition and scope of the (upstream and downstream) "chain of activities" for financial undertakings has been a subject of discussion within the trialogue. As part of these discussions, the Council, Parliament and the Commission suggested different approaches and it remains to be seen what the outcome of their compromise entails. The downstream part of the value chain of these undertakings is temporarily excluded, but the directive will include a review clause for possible future inclusion of the downstream part.
Climate transition plan
The CSDDD will include an obligation for large companies (including large companies in the financial sector) to adopt and put into effect through best efforts (an "obligation of means"), a transition plan for climate change mitigation. Management at companies with over 1000 employees will be entitled to receive financial benefits for implementing their transition plan. What these benefits look like, remains to be seen.
EU member states must appoint a supervisory authority for overseeing compliance with CSDDD obligations (whether this only relates to the due diligence obligations or also to the obligation to adopt a climate plan, remains to be seen). The national authority will be able to initiate inspections and investigations, as well as impose penalties on companies that fail to comply. Sanctions may include public disclosure (“naming and shaming”) and fines of up to 5% of the company's net worldwide turnover.
To provide an additional incentive, the CSDDD will stipulate that adherence to due diligence obligations can serve as a component of the award criteria for both public and concession contracts.
Those affected by adverse impacts (including trade unions or civil society organisations) will have the right to bring a claim for damages within five years. The CSDDD will further address the disclosure of and rules on evidence, injunctive measures, and efforts to limit claimants' legal costs.
With the agreement now in place, formal approval from both the Council and the European Parliament is required before the CSDDD can enter into force. Since the final text is not yet available, implementation timelines remain unclear. We will publish another update based on the final text.
Dutch RSIBC bill developments
Advice by Dutch Council of State
In a previous article, we mentioned that the Dutch Council of State had been asked to provide advice on the September 2023 memorandum of amendments to the bill. This advice was published on 11 December 2023 and covers: (i) the independent readability of the memorandum of amendments, and (ii) a recommendation to explain how the definitions in the bill, including "company", "subsidiary" and "parent company", relate to similar terms in Book 2 of the Dutch Civil Code and in the CSDDD.
The Council of State has limited its advice to these new elements and stressed that the advice must be read in conjunction with its previous advice, which contained significant criticism on the bill. For the latter, see this article. The reference to the Council of State's previous advice could be read to imply that the Council of State does not believe its prior criticism has been adequately addressed in the updated bill.
Second memorandum of amendments published
On 5 December 2023, the bill's initiators published a second memorandum of amendments. These amendments are proposed as a result of consultations between these initiators and staff at the Netherlands Authority for Consumers and Markets (ACM), the intended supervisory authority under the bill.
These proposed amendments will be discussed during a procedural meeting of the Standing Committee on Foreign Trade and Development Cooperation on 21 December 2023.
Future of RSIBC bill
It remains to be seen how the recent agreement on the CSDDD at the EU level will impact the future of this Dutch bill; how the CSDDD and the bill might interrelate; and whether the national implementation of the CSDDD in the Netherlands will contain a top-up based on the RSIBC bill.