Trialogue negotiations have begun following the parliament’s vote.

On 1 June 2023, the European Parliament voted to adopt its initial negotiating position on the EU’s proposed Corporate Sustainability Due Diligence Directive (CSDDD).

If adopted, the CSDDD would apply to large EU and non-EU businesses with significant net turnover in the EU. It would impose requirements to identify, prevent, end, or mitigate the negative impact of activities on human rights and the environment. CSDDD is still in the trialogue stage, whereby the three core branches of the EU negotiate the final content of legislation. Hence, the specific details of the CSDDD continue to evolve as they are negotiated by the EU’s political institutions. Further, as a directive that would need to be transposed into the domestic law of each EU Member State and given the key role for national regulators under the proposals, the CSDDD’s exact scope and impact will depend on the results of the negotiations and its implementation in each of the EU’s jurisdictions.

Background and Legislative Process of the CSDDD

On 23 February 2022, the European Commission (Commission) introduced a proposal for a due diligence directive with aims to foster sustainable and responsible corporate behaviour. For further background to the CSDDD, refer to this Latham blog post discussing the proposal, including the requirements and scoping that the Commission proposed. The European Council (Council) then adopted its “general approach” on 1 December 2022. The two positions include areas of significant difference (as discussed further in this Latham blog post), notably in regards to the scope of the CSDDD, the definition of a company’s value chain, and its approach to financial undertakings.

On 1 June 2023, the European Parliament (Parliament) adopted its position on the proposed CSDDD, marking the next step in the legislative process. The vote sets out Parliament’s mandate to enter trialogue discussions with the Member State governments in the Council of the EU and the Commission.  

Details of Parliament’s Position

Parliament’s position includes a number of notable proposals, including:

• Scope — An amendment per the Parliament’s position is the scoping criteria regarding the application of CSDDD, expanding the number of organisations that would fall under the CSDDD and removing the concept that businesses in “high risk sectors” may face lower thresholds to fall within the scope of the CSDDD. Parliament also proposed a timeline for delayed implementation depending on the size of the organisation.
• Director’s duties — The imposition of a duty of care for directors to ensure that the CSDDD’s requirements were met was a key point of difference between the proposals of the Commission and Council. The Parliament’s proposal includes a provision creating a director’s duty of care, however a further article (that was included in the Commission’s proposal and covered directors’ oversight of this duty) was removed. This issue will likely prove a key topic of negotiation during the trialogue process, with different parties holding strong views on the extent to which such duty of care and oversight provisions for directors are a critical element of the CSDDD.
• Inclusion of the financial sector — The financial sector is explicitly included in the Parliament’s proposal (with certain carve outs), in contrast to the Council’s opinion which would make applicability to financial services the decision of the Member States. Again, this issue promises to be a keenly contested area during the trialogue process.
• Due diligence requirements – Parliament’s position includes reference to the “value chain” of a company, with due diligence measures required in relation to an undertaking’s own operations, those of their subsidiaries, as well as their direct and indirect business relationships in their value chains. The Commission’s proposal also refers to a company’s “value chain” for diligence requirements. This is in contrast to the Council’s position which refers to “chain of activities”, focusing on company suppliers with diligence measures not required in relation to the users of the company’s products or provision of services.

Further changes from the Commission’s proposal include the introduction of remediation for those affected by unfair corporate practices and linking the variable remuneration of directors of large companies (here referring to those with over 1000 employees) to the implementation of climate change transition plans.

Negotiating Areas

Based on the differing positions of the European Parliament and Council in respect of the Commission’s proposal, the following points are likely to emerge as key negotiation issues:

• The scope of application, addressing both size of companies within the scope of CSDDD, and the extent to which the financial sector falls under scope
• The introduction of a directors’ duty of care and its consequences
• The topic of harmonisation across the bloc

Next Steps

Interinstitutional negotiations began in June 2023 between the European Parliament, European Council, and European Commission.

The CSDDD is not expected to be formally adopted before 2024, after which Member States will have two years to implement it into national legislation.

Latham & Watkins will continue to monitor developments in relation to the CSDDD and other legal initiatives on supply chain due diligence in the EU and globally.