EU Member States agree on EU supply chain rules

19/03/24

Very large companies will get duties of care ('due diligence obligations') in the field of sustainability. This means they need to investigate and act on actual and potential adverse impacts on the environment and human rights caused within their entire value chain. This includes upstream business partners of the company and partially the downstream activities. These obligations stem from the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D).

The Council of the EU (Member States) and the European Parliament previously reached an informal agreement on a previous text of the CSDDD in December 2023, with a considerably larger scope. Despite this agreement, the Council voted against the previously agreed-upon text and only after major amendments adopted the CSDDD on 15 March 2024. Currently, an estimated 5.500 companies will be affected by the CSDDD under the adjusted scope (1.000+ employees and 450 million+ euro turnover).

If the EU Parliament also agrees on the adopted text of the Council, the CSDDD is formally adopted. In preparation to the plenary vote, the EP’s Legal Affairs Committee adopted the CSDDD on 19 March 2024. After publication in the EU Journal, Member States will have two years to implement these measures in their national legislation.

What does this mean for you?

If you have 1.000 employees or more and an annual turnover of at least 450 million euro, the CSDDD applies to you. If you qualify, you need to mitigate your (potential) negative impact on human rights and the environment in the EU and globally. This relates to your own operations, those of your subsidiaries, and those carried out by your business partners. You will need to integrate this ‘due diligence’ into your policies and risk-management systems.

Not complying with the obligations can result in penalties by national supervisory authorities, but also civil liability claims or in some cases even criminal proceedings. The penalties can include fines of up to five percent of companies’ net worldwide turnover. For civil liability claims, stakeholders have a period of at least five years to bring such claims. Upon implementation in national law, the period can be longer and in any case not lower than the limitation period laid down under general civil liability national regimes.

Some highlights

These highlights are based on the text as adopted by the Council on 15 March 2024.

Applicability scope - large companies with at least 1.000+ employees and a net worldwide turnover of 450 million euro or more in the last financial year for which annual financial statements (should) have been adopted. For ultimate parent companies the (consolidated) group is taken into account. Also included are franchises with a turnover of more than 80 million euro whereby at least 22.5 million is generated by royalties. Previously there was an adjusted threshold for high-risk sectors, this has been taken out with a remark that this can possibly be addressed later.

Financial sector - only duty for upstream risks and climate plans. All references to financial activities in the downstream part of the chain of activities as well as a review clause to consider the potential future inclusion of the sector have been removed.
Scope in the value chain - this has come down to the upstream and downstream 'chain of activities', with inclusion of companies’ upstream partners working in design, manufacture, transport and supply, and downstream partners, including those dealing with distribution, transport and storage. Downstream activities no longer standard include disposal and recycling, but only if this is part of the downstream business activities (e.g. refund upon return of products).
Thematic scope - for human rights, new elements have been added to the instruments listed in the Annex, particularly for vulnerable groups and ILO core conventions.
Liability - civil liability limited to cases of damage caused by a company through intent or negligence. Period of 5 years to bring claims, by those concerned by adverse impacts, including trade unions and NGOs.
Disengagement - this is only seen as a last resort, when impacts cannot be prevented or ended.
Risk-based approach to due diligence - in line with UNGPs and OECD Guidelines.
Public procurement - compliance with the CSDDD can be used as criterion for access to public procurement.
Directors' duties - deleted from the Directive.

Scope of the CSDDD

The CSDDD will apply to large EU companies, i.e. those with more than 1.000 employees and a worldwide turnover of 450 million euro, meeting these criteria in the last financial year for which annual financial statements (should) have been adopted. With respect to non-EU companies, the agreement states that the applicability of the CSDDD is determined by their net turnover generated in the EU, with a threshold of 450 million euro. The Commission will publish a list with non-EU companies that fall under the scope of the directive. In addition, the agreement stipulates that the financial sector will be partially excluded from the scope of the directive, with only obligations related to upstream activities and climate plans being applicable.

Obligations under the CSDDD

The directive sets forth regulations that outline the responsibilities of large companies regarding the environmental and human rights impact of their business activities. The companies in scope are required to implement a sustainability due diligence policy, identify and address negative consequences for human rights and the environment, establish a complaints procedure, conduct regular monitoring and evaluations, and make evaluation results public, while certain organisations must also develop a climate plan aligned with the Paris Agreement. These obligations extend to the company’s supply chain partners upstream as well as downstream, including distribution and recycling.

As a final measure, companies will be required to terminate business relations with partners that are found to have adverse impacts when these cannot be prevented or remedied. Moreover, the provisional agreement expands the list on what may qualify as impacts on human rights and environment in Annex I, including with regard to vulnerable groups, ILO core conventions, civil and political rights and measurable environmental degradation.

Enforcement of the CSDDD

The CSDDD incorporates mechanisms to ensure civil enforcement and the provisional agreement strengthens the ability of affected parties, including individuals, trade unions, and civil societies, to seek justice. Parties adversely affected will have a window of at least five years to initiate claims against a company. Moreover, claimants will benefit from limited requirements for evidence disclosure, the implementation of injunctive measures, and reduced costs associated with legal proceedings.

The directive also includes provisions for financial sanctions imposed by supervisory authorities in each EU Member State. Non-compliance with the CSDDD will result in financial penalties for damages arising from human rights or environmental issues. The provisional agreement states that sanctions may include fines amounting to at least five percent of the company's net worldwide turnover.

Additionally, adherence to the Directive can be considered as a criterion for the award of public contracts and concessions.

What’s next?

Now that the EU Member States have finally agreed on this text for the CSDDD, the European Parliament also needs to give their vote to this text. With the EU elections approaching in June 2024, the adopted CSDDD is expected to be scheduled in the European Parliament’s JURI Committee on 19 March 2024 and the European Parliament plenary vote should then take place the week of 22 April 2024.

After the final text has been formally adopted by both the Council and Parliament it will be published in the EU Journal. The responsibility then falls on the Member States to implement the CSDDD into their national legislation within a two-year timeframe. As a result, it is anticipated that the first companies need to apply CSDDD for financial years starting on or after 1 January 2028.