Introduction
On June 1, 2023, after a period of intense negotiations, the EU Parliament adopted its amendments to the proposal
for the Directive on Corporate Sustainability Due Diligence (CSDDD) presented by the EU Commission on February 23, 2022. The below is a summary of the most relevant changes introduced by the EU Parliament. Our team has focused on the following elements crucial for large enterprises:
- Companies in scope of CSDDD
- Impact in the scope of the due diligence exercise
- Obligation to adopt transition plans
- Timeline for applicability of the new rules
Due to the ongoing legislative process, the below provisions might still change during negotiations between the EU Parliament and Council. Please note that due to significant divisions in the positions of members of Parliament (MEPs), the language of some of the amendments adopted by the EU Parliament may be inconsistent.
Obliged Entities
Main Changes Compared to EU Commission’s Proposal
The EU Parliament retained the applicability of the rules to companies established both in and outside the EU, but (i) modified the thresholds determining the obliged entities, (ii) eliminated the link to high-impact sectors, and (iii) slightly extended the types of contractual relationship to be taken into consideration for the calculation of the average number of employees.
Summary of the Rules Under Amendments of the EU Parliament
With regard to EU companies, the EU Parliament proposes to apply the CSDDD to two categories of companies meeting the following criteria:
With regard to non-EU companies, the EU Parliament proposes to apply the CSDDD to, similarly to EU companies, two categories of companies meeting the following criteria:
In terms of calculating the company’s average number of employees, not only temporary agency workers, but also other workers in non-standard forms of employment shall be included in the calculations as if they were workers employed directly by the company for the same period of time.
Impact Subject to Due Diligence Obligations
Main Changes Compared to the EU Commission Proposal
The EU Parliament has proposed:
• Limiting due diligence obligations to impacts that are (i) caused, (ii) contributed to, or (iii) directly linked to company operations and certain related entities
• Narrowing the scope of non-subsidiaries whose impact it must monitor, specifying that apart from having established business relationships, it needs to form part of its value chain
Summary of the Rules Under Amendments of the EU Parliament
The EU Parliament’s negotiating mandate lays down the rules on due diligence obligations that companies will have to conduct in relation to:
- Actual and potential human rights adverse impacts
- Environmental adverse impacts
This will be applicable if they caused, contributed to or are directly linked to:
Transition Plans Tackling Global Warming and Steering Toward a Sustainable Economy
Main Changes Compared to the EU Commission Proposal
The EU Parliament extended the obligation to develop a plan aligning a company’s business model and strategy to various sustainability goals to all companies falling within the scope of CSDDD and provided specific elements the plan should contain.
Further, the EU Parliament specified that for companies with more than 1,000 employees on average, part of a director’s variable renumeration must be linked to the company’s transition plan.
Finally, Article 26, which would have made company directors legally responsible for due diligence, was rejected by the EU Parliament. As the Council’s general approach was more lenient regarding directors’ duties in the proposed directive, it appears the legal requirements imposed on company directors would be limited after the end of the negotiations
Summary of the Rules Under Amendments of the EU Parliament
Companies will be obliged to develop and implement a transition plan*** to ensure that their business model and strategy are aligned with the objectives of:
- The transition to a sustainable economy
- Limiting global warming to 1.5 degrees Celsius in line with the Paris Agreement
- Achieving climate neutrality as established in the European Climate Law as regards its operations in the EU, including its 2050 climate neutrality target and the 2030 climate target
This plan shall include a description of:
- The resilience of the company’s business model and strategy to risks related to climate matters
- Opportunities for the company related to climate matters
- Where appropriate, an identification and explanation of decarbonization levers within the company’s operations and value chain, including the exposure of the company to coal-, oil- and gas-related activities
- How the company’s business model and strategy take account of the interests of the company’s affected stakeholders and the impacts of the company on climate change
- How the company’s strategy has been implemented and will be implemented with regard to climate matters, including related financial and investment plans
- The time-bound targets related to climate change set by the company for scope 1, 2 and, where relevant, 3 emissions, including, where appropriate, absolute emission reduction targets for greenhouse gas for 2030 and in five-year steps up to 2050 based on conclusive scientific evidence, and a description of the progress the company has made toward achieving those targets
- A description of the role of the administrative, management and supervisory bodies with regard to climate matters
*** The plan must be compatible with the reporting requirements in Article 19a of Regulation (EU) 2021/0104 (CSRD)
Applicability of the CSDDD Rules
Main Changes Compared to the EU Commission Proposal
The EU Parliament modified the dates the rules enter into effect for different categories of obliged entities. These will be deliberated in the upcoming negotiations between the Council and EU Commission. In any case, once the rules are published, Member States will be required to transpose the rules into national law.
Summary of the Rules Under Amendments of the EU Parliament
(a)Three years from the entry into force of CSDDD
Under the Parliament proposal, new rules will be applicable three years from entry into force of CSDDD to companies that meet the following criteria:
- For two categories of EU companies established*
For two categories of non-EU companies*
(b) Four years from the entry into force of CSDDD
Under the Parliament proposal, new rules will be applicable four years from entry into force of CSDDD to companies that meet the following criteria:
- For two categories of EU companies*
- For two more categories of EU companies*
- For two categories of non-EU companies*
(c)Five years from the entry into force of CSDDD (by way of derogation; requires notification to supervisory authorities)
- For one category of EU companies*
