On 30 November 2022, the Council of the European Union (the “Council”) adopted its negotiating position on the European Commission’s proposal for a corporate sustainability and due diligence directive (the “Draft Directive”). As discussed in our previous blog posts (which you can read here and here), the proposed Draft Directive set out an EU standard for human rights and environmental due diligence (“HREDD”) and required EU member states to introduce legislation making in-scope companies responsible for violations of HREDD standards across their entire value chain. This meant that companies would have to conduct HREDD on their suppliers and clients, and could be held liable for how their products and services are used and disposed of. Although the fundamental principles of the proposed Directive remain intact, the Council’s suggested amendments to the Draft Directive do include some important changes.
Key amendments to the Draft Directive
The Draft Directive will still apply to large EU and non-EU companies that meet the criteria set out in Article 2 of the Draft Directive. However, similar to the German Supply Chain Due Diligence Act (please read our earlier blog posts on this Act here, here and here), the Council’s suggested amendments introduce a phase-in approach regarding the application of the rules, meaning that it will take effect:
- Three years from entering into force for:
- EU companies with more than 1,000 employees and a net worldwide turnover of more than EUR 300 million; and
- non-EU companies with a net turnover of more than EUR 300 million in the EU;
- Four years from entering into force for:
- EU companies with more than 500 employees and a net worldwide turnover of more than EUR 150 million; and
- non-EU companies with a net turnover of more than EUR 150 million in the EU; and
- Five years from entering into force for:
- EU companies with more than 250 employees and a net worldwide turnover of more than EUR 40 million – provided that at least 50% of this net turnover was generated in a “high-risk” sector (which includes textiles, clothing and footwear, agriculture, forestry, fisheries, food and extractives); and
- non-EU companies with net turnover of more than EUR 40 million but not more than EUR 150 million, provided that at least 50% of its net worldwide turnover was generated in one of the “high-risk” sectors noted above.
Furthermore, in what marks a significant change from the proposed Draft Directive, the Council has suggested that the applicability of the Draft Directive to financial services be optional, meaning that EU Member States will have complete discretion as to whether to include financial services within scope when implementing the Draft Directive into national law.
Due diligence obligations
In the proposed Draft Directive, in-scope companies were essentially required to implement HREDD measures that covered their entire supply chains and value chains by virtue of Articles 5-11. However, the Council’s suggested amendments replace the term “value chain” with “chain of activities”. The definition of “chain of activities” is narrower than “value chain”, as it covers companies’ suppliers, but does not fully cover the use of companies’ products or the provision of companies’ services. This means that in-scope companies will now have less onerous due diligence obligations than initially proposed.
Articles 25 and 26 of the proposed Draft Directive, which regulated directors’ duty of care and imposed a duty for directors to set-up and oversee the due diligence actions of companies, have been removed in the Council’s suggested amendments to the Draft Directive. This is in response to concerns expressed by EU Member States that considered the provisions to be an inappropriate interference with national laws relating to directors’ duty of care.
Civil liability regime
The Draft Directive’s civil liability regime (Article 22) has also been amended. The four conditions that have to be met for a company to be held liable, namely (1) damage caused to a natural or legal person, (2) breach of the duty, (3) the causal link between the damage and the breach of duty and (4) fault, have been clarified in the text. In addition, the rights of victims of human rights and/or environmental adverse impacts to full compensation were expressly provided for in the Council’s suggested amendments.
What happens next?
In accordance with the usual EU legislative process, the Draft Directive is now being considered by the European Parliament. Following this review, the European Parliament will vote and determine its initial negotiating position. Thereafter, the European Parliament and the Council will engage in negotiations with the aim of reaching a final and agreed text of the Directive, which may well be subject to further significant changes in light of ongoing lobbying initiatives by civil society organisations, corporates and investors (for further information on investor calls for legislative reform, read our earlier blog posts here and here). EU Member States will then have two years to transpose the Directive into their national legislation.
In the meantime, many corporates are looking to the United Nations Guiding Principles on Business and Human Rights (the “UNGPs”) for guidance (for further information on the UNGPs, please read our earlier blog posts here and here) and are coming to terms with emerging national legislation that foreshadows the Draft Directive (for further information on the relevant German, Dutch, French and Norwegian legislation, please read our earlier blog posts here, here and here).