Council of the EU approves a lessened Corporate Sustainability Due Diligence Directive (CSDDD)

The adoption of the new European rules on responsible business conduct by the Council of the EU was a Pyrrhic victory. Although the new compromise law falls short of its original ambitions, it paves the way for greater corporate responsibility in the area of sustainability, while leaving the door open for future improvements. In this context, the ABBL continues to support its members in improving their human rights monitoring.

It has been a nail-biting few weeks for those who have been closely following the development of the Corporate Due Diligence Directive (CSDDD), a new law that introduces some of the toughest rules in the sustainability sphere yet. The Directive was an ambitious initiative from the outset. Unsurprisingly, its level of ambition was met with an equal amount of controversy.

Negotiations between the EU lawmakers – the European Parliament and the Council of the EU – got off to a rocky start, as many sensitive issues needed to be resolved: How many companies should be covered by the directive? Should financial services be included in the due diligence obligations? Should the remuneration of company directors be linked to the effectiveness of the company’s compliance plan? Many of these issues remained unresolved until legislators suddenly reached a political agreement at the end of December 2023. From then on, the way seemed clear for rapid approval of the directive. This was not the case.

The technical work of translating the political compromises into concrete legal language continued behind closed doors throughout January. As the new draft compromise became available, more and more Member States expressed their concerns, if not outright opposition, to the final content of the law. In the weeks that followed, Belgian policymakers, who will hold the presidency of the EU Council until the summer, scrambled to gather support for the directive.

Finding a new deal seemed increasingly unlikely as the weeks passed and the file kept being postponed. However, on 15 March, the last technically possible date for passing the directive, the Council finally agreed on a new version of the text. To get Member States to agree, however, the Belgian Presidency had to slash through the contents of the law significantly.

New year, new me

The essence of the law remains, i.e. its rules will still require companies to screen their supply chains and distribution, transport and storage channels to ensure that human rights and environmental standards are respected, using a risk-based approach. They will also have to present decarbonisation plans aligned with the objectives of the 2015 Paris Climate Agreement. Importantly, in-scope companies can be held liable for damage caused to people, communities or the environment as a result of their failure to comply with the new legal requirements.

On the other hand, far fewer companies will now be affected by the CSDDD. Due diligence obligations relating to companies’ downstream value chain, i.e. operations linked to the delivery of their products and services to end customers, are now more limited. Companies will no longer have to financially incentivise their decision-makers to implement the necessary and effective processes to comply with the Directive. The additional requirements imposed on companies operating in high-risk sectors have also been removed. For the time being, due diligence rules do not extend to financial services until the European Commission determines whether it would be worthwhile to include them in the downstream value chain of financial companies.

A door opens

For civil society in particular, but also for many of the responsible business coalitions that argued for an ambitious law, the conclusion of this tense dossier is a win, albeit a bittersweet one. Nevertheless, even in its battered form, the CSDDD remains a significant achievement. Firstly, it incorporates the United Nations Guiding Principles on Business and Human Rights and the OECD Guidelines for Responsible Business Conduct into the European legal framework. In other words, the directive marks the shift from the previously prevailing soft law approach on human rights due diligence to tangible legal obligations for companies, though only for very large ones. The directive will also put national supply chain laws, which have emerged across the EU in various forms in recent years, on a more equal footing.

The CSDDD echoes another piece of sustainability legislation whose first iteration failed to deliver. A 2014 directive aimed to harmonise corporate sustainability transparency across the EU, but it was fatally flawed by failing to impose standards on the disclosure of such information. Only few companies were affected, too. Eight years later, those rules have been completely revised to bring the directive much closer to its original ambitions. Perhaps the CSDDD will follow a similar course.

What’s next?

The EU Council vote was the make-or-break moment for the CSDDD. The new compromises were then quickly approved by one of the European Parliament committees in charge of the file. Legislators can now give their final green light at the end of April, right before the European elections. From there, EU countries will then have two years to transpose the directive into their national laws.

Despite the Directive’s narrower scope and more limited requirements, the ABBL will continue to work on human rights due diligence as one of its priority areas. Our Corporate Sustainability Working Group is our platform for discussing these issues and for exchanging views with third parties who have relevant expertise in this area. At the same time, we are continuing our work to develop specific guidance as part of the ABBL’s practical guide on corporate social responsibility.