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European Union: Provisional agreement reached on the Corporate Sustainability Due Diligence Directive

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Implying that it will presumably be enacted by the end of this year

In brief

On 14 December 2023, the Council of the EU and the European Parliament have reached a compromise on the Corporate Sustainability Due Diligence Directive (CSDDD), paving the way for its formal adoption by both institutions and thus the CSDDD’s entry into force before year end. The CSDDD is intended to significantly reshape corporate due diligence obligations regarding human rights and environmental standards in the EU and beyond. With its imminent enactment, the EU Member States will have two years to enact national laws providing for respective corporate due diligence obligations, similar to what the German Supply Chain Act already in its current form provides for.

Contents

  1. Key highlights
  2. In detail
  3. Outlook

Key highlights

1. Expansive scope: Approximately 13.000 companies inside the EU and 4,000 additional companies incorporated outside the EU are in scope of the CSDDD. 

2. A strengthened climate mandate: Next to its protection of human rights, the CSDDD adopts a holistic approach to climate protection. Companies will have to develop plans aligning their business strategies with sustainability and limiting global warming to 1.5 degrees Celsius.

3. From supply chain to value chain: The scope of due diligence obligations under the CSDDD extends to the entire value chain, upstream and downstream.

4. Liability and penalties: The agreement provides for a civil liability regime. Victims can claim compensation from a company in a European court if they can prove that they suffered damage because of a violation of human rights or environmental standards by said company. National authorities can also impose penalties, such as fines up to 5% of the annual group turnover.

In detail

The current draft directive sets out a wide scope of application in Article 2. Many businesses will be affected by the CSDDD. The draft directive encompasses both EU-based companies and companies from third countries, provided certain thresholds of employees and turnover are met. According to the explanatory memorandum of the initial proposal by the European Commission, approximately 13,000 companies inside the EU and approximately an additional 4,000 companies incorporated outside the EU will be in scope.

Companies constituted under the law of an EU Member State would be in scope of the directive if they meet the thresholds of Group 1 or Group 2, as outlined in the table below:

The CSDDD also provides for an applicability of its obligations to non-EU companies, if they meet the relevant turnover thresholds within the EU.

The material scope of the CSDDD encompasses the entire value chain, upstream and downstream. 

  • The upstream value chain includes all activities of a company related to product manufacturing, such as raw material extraction, and provision of services.
  • The downstream value chain includes all activities conducted by business partners regarding distribution, transportation, storage, and disposal.

Companies will be required to undertake due diligence to identify, where necessary also prevent or mitigate potential adverse impacts, and to end adverse impacts of their activities. Such adverse activities include slavery, child labor, labor exploitation, environmental degradation, pollution, and biodiversity loss. In-scope companies will also have to monitor and assess the impact of their value-chain partners including e.g. suppliers, sales, transport, distribution, storage, and waste-management. Companies will further have to develop plans aligning their business strategies with sustainability and limiting global warming to 1.5 degrees Celsius (Paris Climate Agreement).

The CSDDD includes the possibility of civil liability. It enables affected parties to directly file claims against companies for damages stemming from human rights violations or environmental harm within the value chain.

Another enforcement mechanism provided for by the CSDDD are sanctions imposed by the competent national authorities in case of a violation of due diligence obligations. They may include fines of up to 5% of the annual group turnover.

Key to comply with the national laws implementing the CSDDD at EU Member State level going forward will be the establishment of a risk management system that allows for regular risk analyses as well as prevention and remediation mechanisms, including an internal complaint procedure for disclosing human rights and environment-related risks and violations.

Outlook

The negotiations on the CSDDD have reached the finishing line. It will now be officially adopted by the Council of the Union and the European Parliament, before entering into force in the very near future. 

Should you require further information or assistance in navigating these regulatory developments, please do not hesitate to contact us.

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Author

Anahita Thoms heads Baker McKenzie's International Trade Practice in Germany and is a member of our EMEA Steering Committee for Compliance & Investigations. Anahita is Global Lead Sustainability Partner for our Industrials, Manufacturing and Transportation Industry Group. She serves as an Advisory Board Member in profit and non-profit organizations, such as Atlantik-Brücke, and is an elected National Committee Member at UNICEF Germany. She has served for three consecutive terms as the ABA Co-chair of the Export Controls and Economic Sanctions Committee and as the ABA Vice-Chair of the International Human Rights Committee. Anahita has also been an Advisory Board Member (Beirätin) of the Sustainable Finance Advisory Council of the German Government.

Anahita has won various accolades for her work, including 100 Most Influential Women in German Business (manager magazin), Top Lawyer (Wirtschaftswoche), Winner of the Strive Awards in the category Sustainability, Pioneer in the area of sustainability (Juve), International Trade Lawyer of the Year (Germany) 2020 ILO Client Choice Awards, Young Global Leader of the World Economic Forum, Capital 40 under 40, International Trade Lawyer of the Year (New York) 2016 ILO Client Choice Awards. In 2023, Handelsblatt recognized her as one of Germany’s Dealmaker and “most sought after advisors of the country” in the field of sustainability.

Author

Dr. Alexander Ehrle is a member of the Firm's International Trade Practice in Baker McKenzie's Berlin office. Alexander studied law at the Universities of Heidelberg, Montpellier (France), Mainz, Munich and New York (NYU) specializing in Public International and European Law. He worked as advisor and member of a delegation of a developing country at the United Nations before qualifying for the German bar. He spent his clerkship with the Higher Regional Court in Berlin, the German Ministry of Foreign Affairs in Berlin and Tokyo as well as an international law firm in Frankfurt and Milan. He wrote his doctoral dissertation on the structural changes of public international law and their conceptualization in academic discourse basing his research on the governance of areas beyond national jurisdiction. Alexander is admitted to practice in Germany and New York. 

Alexander co-chairs the Business & Human Rights Committee of the American Bar Association’s International Law Section and has been recognized as one of 40 under 40 lawyers worldwide for foreign investment control by the Global Competition Review.

Author

Kimberley Fischer is a member of the International Trade Practice in Baker McKenzie's Berlin office. She joined the Firm in 2022. Kimberley studied law at the Ruprecht Karls University of Heidelberg and the Universidad de Deusto (Spain), with a focus on public international law and human rights. Prior to joining the Firm, Kimberley completed her legal traineeship at the Higher Regional Court of Frankfurt am Main, the German Federal Foreign Office in Berlin and at an international law firm in Brussels and Frankfurt am Main. She also gained significant experience in public (international) law as a research assistant at the University of Heidelberg and at a reputable law firm.

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