Scope
The agreed scope of application is in line with the original EU Commission proposal. This means that the CSDDD will apply to three groups of companies, namely:
- EU companies with more than 500 employees and a net worldwide turnover of more than EUR 150 million
- EU companies with more than 250 employees and a net global turnover of more than EUR 40 million of which at least EUR 20 million is one of the following sectors:
- manufacture and wholesale of textiles, clothing and footwear
- agriculture (including forestry and fisheries)
- manufacture of foodstuffs and trade in agricultural raw materials
- mining and wholesale of minerals or manufacture of related products and construction.
- Non-EU companies with EUR 150 million in the EU, a list of which will be published by the European Commission in good time.
Thus, the European Parliament’s proposal to make the CSDDD already applicable to companies with more than 250 employees and a net global turnover of more than EUR 40 million, without requiring turnover to have been generated in one of the high-impact sectors, has not held up.
Importantly, companies providing financial services are temporarily exempted from the due diligence obligations under the CSDDD in respect of their downstream activities (such as making investments and providing loans). They will therefore be subject to the CSDDD as regards their own activities as well as upstream activities, such as the purchases they make from their suppliers. Moreover, large companies in the financial sector (like other large companies) will have to prepare a climate transition plan. The CSDDD will include a review clause on the basis of which the downstream activities of financial service providers may still fall within the scope of the directive.
Scope of due diligence
In my previous blog post ESG | What is the CSDDD and how can you prepare your company for it? I wrote that it was being negotiated whether due diligence should extend to activities in the value chain or to the chain of activities (similar to the supply chain). According to the press release from the Council of Ministers, the new rules apply to the entire chain of business activities of large companies, including those of upstream business partners and some of their downstream activities, such as distribution or recycling. The EU legislators seem to have opted for the Council of Ministers’ position of limiting due diligence to the chain of activities rather than the value chain proposed by the European Commission.
Climate transition plan and renumeration
The preliminary agreement contains stricter provisions on the effort obligation of large companies to prepare a transition plan for limiting global warming to 1.5 °C, in line with the Paris Agreement. Thus, it adds that companies must actually implement this plan to the best of their ability.
The EU Commission proposal also stated that companies should take into account compliance with the climate transition plan when setting variable executive pay, if the variable pay is linked to an executive’s contribution to the company’s business strategy, long-term interests and sustainability. The Council of Ministers had proposed dropping this provision. From the press conference held by the Council of Ministers and the European Parliament, I gather that this provision remains in place after all. It specifically mentions, for instance, that this also applies to financial service providers that are required to prepare a climate transition plan due to their size.
Civil liability
The press release from the Council of Ministers states that the preliminary agreement gives injured parties better access to justice. Those adversely affected (trade unions and civil society organisations included) will be given five years to bring a claim. It adds that access to evidence, strike action and litigation costs for claimants will also be restricted. This is probably meant to address these issues and instead make it easier for injured parties to access evidence and claim cessation of the activities in question.
Sanctions
When adopting implementing legislation, Member States should also include provisions on penalties for non-compliance. The penalties should be effective, proportionate and dissuasive. Moreover, fines should be related to the turnover of the undertaking. The highest possible fine should be at least 5% of the company’s net turnover. The preliminary agreement adds that measures should be taken to stop the activities of an undertaking if the undertaking concerned does not pay the fine imposed on it. It also mentions the sanction of naming and shaming, which will involve public disclosure of the violation.
Other topics
The European Parliament and the Council of Ministers also mention in their press releases that agreement was reached on a number of issues that were less controversial than those mentioned above. For instance, they mention that companies must set up a complaints procedure, communicate on the due diligence policies they conduct, and measure the effectiveness of the due diligence policies they conduct. Companies that identify negative human rights or environmental impacts by their business partners should sever those relationships if the negative impacts cannot be prevented or ended.
If you would like to know more or have any questions about ESG and your business, please feel free to contact Stephanie ter Brake
