The Council of the EU has proposed a new compromise text for the Corporate Sustainability Due Diligence Directive, on which political agreement had previously been reached in December 2023. 

The Directive proposes to introduce a sustainability due diligence duty on large EU companies and non-EU companies with significant EU activity to identify, prevent, mitigate, bring to an end and account for certain adverse human rights and environmental impacts in their own operations, their subsidiaries and their value chains.

However, in February 2024 the Council failed to endorse the political agreement. It is usually considered a formality to endorse provisional political agreements and the failure of member states to agree to the text was a significant departure from the norm.  It has therefore led to some concern that other draft legislation may be rejected, including other proposals that form part of the European Green Deal.

The revised text is now on the European Parliament plenary agenda for adoption on 24 April 2024.

So what are the key changes?

Among other things, the Council has proposed a significant alteration to the scope, which will dramatically limit the scope of companies that will be required to comply with the Directive. The key change is to amend the scope to EU companies that have more than 1,000 employees and a net worldwide turnover of more than EUR450 million.   Non-EU companies will fall within scope if they have a turnover of more than EUR450 million, regardless of number of employees.

The text does not include different thresholds or other provisions that apply to companies operating in high-risk sectors. This represents a further departure from both the original text and the previous agreement. The Commission will issue guidelines for specific sectors on how to fulfil the due diligence obligations and will also report within six years on the implementation of the Directive, specifically to address (among other things) whether a sector-specific approach is warranted for high-risk sectors.

The compromise text provides that in-scope companies must address adverse environmental and human rights impacts, including those arising from their "chain of activities". However, the provision of services by downstream business partners is excluded from the chain of activity definition.

The due diligence obligations have been expanded and are similar to the requirements of the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises on Responsible Business Conduct. Directors are neither subject to a duty of care, nor are they responsible for setting up and overseeing the due diligence obligations. 

The maximum limit of financial penalties will be not less than 5% of the net worldwide turnover of the company in the financial year preceding the fining decision, which is not insignificant but not quite to the level of the GDPR-style fines that have caused such a stir in the past (and which have influenced consumer legislation in  the UK as reflected in the DMCC bill).  

Member states are required to transpose the Directive into national law within two years of its entry into force. Application then takes effect on a staggered basis, with more generous timeframes than under the previously agreed text.

The key takeaway is that the bite of the Directive has been significantly weakened and potentially sets a precedent for future draft legislation in this space.