A picture taken on May 5, 2021 shows a flag of the European Union flying outside the European ... [+]
After weeks of delays, the European Council has approved the Corporate Sustainability Due Diligence Directive. The CSDDD creates a legal liability for companies relating to environmental and human rights violations within their supply chain. However, to reach an agreement, the final CSDDD is significantly watered down from the initial proposal. A move that will frustrate sustainability advocates. The directive will now go to the European Parliament for approval.
As the name implies, the CSDDD, also called the CS3D, establishes a corporate due diligence standard on sustainability issues for businesses operating in the EU. In this case, sustainability most directly applies to environmental concerns, climate change, and human rights.
The new due diligence requirements apply not only to the direct actions of the company, but also to their subsidiaries and supply chain. EU based companies, as well as non-EU companies that conduct a set level of business in the EU, could become liable for the actions of their suppliers.
The final draft of the CSDDD, released on January 30, initially appeared poised for easy approval. However, that support quickly eroded following Germany’s indication they will abstain from the vote. France, Italy, and other members followed Germany’s lead, making it became clear that the European Council would be unable to get a majority vote in support.
What followed was 45 days of closed-door negotiations, false starts, and political pressure that was an emotional roller coaster for sustainability advocates. Facing a March 15 deadline, the European Council repeatedly placed the CSDDD on the agenda, only to remove it at the last moment when it became clear support was lacking. Multiple deals were leaked, although official documents were kept private. Each deal reduced the scope of the directive. Each deal eventually failed.
The final deal approved by the European Council on March 15 is significantly reduced from the original agreement. Originally, the CSDDD impacted companies with 500 employees and a turnover of €150 million. Those numbers have been raised to 1,000 employees and a turnover of €450 million.
The new deal also removes the high-rise sector approach. That approach would have expanded the scope to include companies that do not meet the employee or turnover requirements but operate in industries with a high likelihood of facing human rights or environmental conflicts.
With those changes, it is estimated that will cut the number of impacted companies to 30% of the original scope. That translates to about .05% of the total number of businesses operating in the EU.
Additionally, the CSDDD will be phased in over a longer period. Companies with 5,000 employees and €1,500 million turnover will be impacted in 3 years. Companies with 3,000 employees and €900 million turnover will be impacted in 4 years. Companies with 1,000 employees and €450 million turnover will be impacted in 5 years.
The CSDDD will now go to the European Parliament. Approval within the European Parliament must go through the legal affairs committee, commonly referred to as JURI. It is expected to pass. However, with the volatile nature of the political process thus far, nothing is certain until the final vote is made.
