On 28 March 2023, an expert roundtable with Freshfields and global companies from different sectors met in Brussels with the responsible persons for one of the EU’s most transformative ESG legislative proposals to date – the Corporate Sustainability Due Diligence Directive (CSDDD or the Directive). With representatives from the Cabinet of EU Justice Commissioner Didier Reynders and the Council of the EU responsible for this dossier it was discussed how the CSDDD negotiations in Brussels will be pushed forward, and what can be expected over the next couple of months in the run up to its adoption.
The roundtable in Brussels was organized by Freshfields and hosted and led by Christoph H. Seibt (Partner at Freshfields, ESG and Corporate Governance expert) and Léa Bareil (Principal Consultant, EU Regulatory & Public Affairs at Freshfields).
In broad terms, the CSDDD sets out, for the first time, a mandatory framework for companies registered or operating within the EU (i.e. including non-EU companies) to carry out due diligence along their supply chains and to identify, prevent or stop adverse impacts related to human rights and the environment, including climate change (see Freshfields last blog post here).
The European Commission released its draft for the CSDDD in February 2022, and on 1 December 2022 the Council of the EU adopted its own position (General Approach). Currently, the European Parliament is preparing its amendments to the draft proposal and is expected to reach a position on the text in late April. Once agreed, the three institutions will be in a position to begin inter-institutional negotiations (trilogues) and agree one definitive and final version of the Directive. We expect that the Directive will be adopted by the end of 2023 with transition periods of about two to four years. However, member states that already have supply chain laws in place, like France, might be inclined to adapt their domestic laws much earlier. This in particular holds true for Germany, where the Government already announced when adopting the German Supply Chain Duty of Care Act that it will review and adapt the Act six months after adoption of the CSDDD.
“It is a legislation that will significantly transform the whole economic sector. Yet, we aim to strike the right balance between holding companies responsible for human rights and environmental protection and preserving their economic competitiveness.”
Tomas Nasarre Serrano, Economic Counsellor, Permanent Representation of Spain to the EU
From the latest drafts and reports available, it is obvious that there are still many points for discussion amongst the legislators, a number of which were discussed with Freshfields, global companies and the EU representatives in Brussels. One of the opening statements made by the representatives during the meeting was that without any doubt the CSDDD will come into force, will not be suspended or delayed due to global crises that are taking place in parallel and will be transformative for businesses.
Defining the scope
A key aspect discussed was that the EU is trying to level the playing field as much as possible for EU companies, which is why non-EU companies generating considerable turnover in the EU are also in scope of the CSDDD. It was mentioned that there had been a huge demand from European citizens conveyed via the EU Parliament and through the European Commission’s public consultation, and debates held at the national level, to avoid fragmentation within the EU on this important and new area of law. Having this in mind, there is no realistic option that non-EU companies might be excluded from the scope, i.e. non-EU companies who maybe were not affected by other domestic supply chain laws within Europe so far, will need to familiarize themselves with the Directive soon.
When the discussion focused on the scope of the CSDDD it was admitted that especially as regards the financial sector heated debates are expected during the upcoming trilogue. The Commission’s draft placed the financial sector within the scope of application of the CSDDD, yet defined the term ‘value chain’ differently for the financial sector and granted some exceptions as regards the comprehensive due diligence duties. The Council’s draft then in turn foresaw many exceptions for regulated financial actors caught under the Directive, including opt-out possibilities for member states, which was criticised by representatives from the financial sector itself as it might result in fragmentation within the EU which was sought to be avoided. The opt-out mechanism was a necessary compromise for the Council to agree its position.
Reach of compliance duties
With respect to the reach of due diligence duties, both representatives made clear that they aim at covering the entire upstream supply chain, although they were well-aware that the level of control is not the same for each tier of supplier, and which was reflected in the text. Further debates are thus expected regarding inclusion of the downstream side, while it seems to be definitive that all tiers of suppliers will need to be monitored diligently. Hence, some domestic restrictions on direct suppliers (1st tier suppliers) in place in other jurisdictions – as in Germany for instance – will most probably not stand after adoption of the Directive.
Directors’ duties and liability
It is also expected that the contested issue of amending directors’ duties with the CSDDD, i.e. adding sustainability as a concern to be considered by directors when acting in the best interest of the company, will cause further debate. Until now the Council has removed this article from its position, and it remains to be seen if the European Parliament will follow suit.
Both representatives also stressed that strong enforcement mechanisms, i.e. civil liability regimes to facilitate access to compensation for victims, are a key priority of the CSDDD, which is why the civil liability regime as laid down in Art. 22 of the current draft will most likely not be removed over the course of the final negotiations.
As anticipated, the discussion was very lively. Indeed, the EU representatives expressed their interest in hearing more about companies’ concerns as well as receiving their support as large globally active companies face challenges that would need to be taken into account as the legislative process unfolds.