On 14 December, the European Council and Parliament reached a provisional deal on the Corporate Sustainability Due Diligence Directive (CSDDD). Given the legislation’s long and troubled history, many observers were surprised by how rapidly the agreement in Brussels came to pass. The CSDDD, which introduces new requirements and obligations related to companies’ actual and potential adverse impacts on human rights and the environment, has attracted a heated debate in recent months. The fact that the new rules include not just the firms’ own operations but also their supply chains has been especially feared by many.
“Today’s agreement is a big achievement for the EU,” comments EU Commissioner for Justice Didier Reynders. “It represents a leap forward to achieve a more sustainable and fairer economy, both from a social and environmental dimension. The new rules will ensure that responsibility and transparency are respected in value chains.”
Despite marking a significant step forward in sustainable regulation, however, CSDDD appears to be still riddled with compromises.
Finance gets special treatment
During the negotiations, whether to include banks, insurers, and asset managers in the CSDDD has been one of the most controversial issues. The Council was generally in favour of allowing individual member states to include parts of the financial sector under the due diligence directive, which would enable countries pushing for the exclusion of financial institutions from the regime, such as France, to exclude local firms from CSDDD requirements. The European Parliament, meanwhile, held the opposite view, deeming that the whole EU financial sector, including asset managers and institutional investors, should be covered.
“According to the deal reached today, financial services will be temporarily excluded from the scope of the directive, but there will be a review clause for a possible future inclusion of the financial downstream sector based on a sufficient impact assessment,” reads the official statement. CSDDD will still require the finance industry, like other sectors, to develop net-zero transition plans. Banks, asset managers and insurers will also face civil liability for any violations by suppliers. However, the industry won’t be held accountable for ESG violations by clients or companies it finances.
Proposed by Spain, which holds the EU’s rotating presidency, the decision appears to be a compromise to reach consensus before the end of the year. Undoubtedly, many experts who have been calling on regulators not to shield the finance industry from the full scope of the legislation are disappointed by the outcome.
Comfortably high thresholds
The agreement should ease some of the worst fears about the directive’s international implications both inside and outside of the block. France, for instance, has been warning that CSDD could hurt the competitiveness of EU firms. Meanwhile, across the ocean, there have been concerns about the potential negative consequences facing US firms due to the scope of the directive.
The agreement means that the directive will only apply to companies with more than 500 employees and global revenue of at least EUR 150 million. As for implications beyond the EU, it states that the rules only apply to non-EU companies that generate more than EUR 300 million in sales in the EU. The European Commission will provide a list of non-EU companies that fall under the directive’s scope.
The agreed draft law still requires formal approval by the Legal Affairs Committee and the European Parliament as a whole, as well as by the Council (EU governments) before it can enter into force.
