EU reaches agreement on corporate due diligence law
Directive includes need for climate transition plans, civil liabilities provisions and the potential for fines of up to 5% of global turnover
The EU has reached a political agreement on the Corporate Sustainability Due Diligence Directive.
After 18 hours of negotiations in Strasburg yesterday, legislators signed off on a deal that could see the law come into force from 2027.
The new agreement requires EU companies with more than 500 employees and a net worldwide turnover of €150m (or non-EU companies that generate €300m within the EU) to produce a Paris-aligned climate transition plan. These will be in line with what’s already laid out in the Corporate Sustainability Reporting Directive, but there is no comply-or-explain component to CS3D.
“It sets a behavioural standard for transition planning,” explains Julia Otten, Senior EU Policy Officer at purpose-driven law firm Frank Bold. “CS3D mandates companies to put transition plans into effect, not just to disclose one if they have it.”
One of the biggest areas of disagreement throughout the negotiations was whether it was reasonable to require companies to execute their transition plans under the law. Some trade bodies and Member States wanted to limit the requirement to the production of a plan. But the language has been strengthened in the final agreement.
“The obligation is now that companies must adopt a transition plan, and then put it into effect,” explained Otten. “Whether it results in them achieving 1.5 degrees is not part of the obligation, but they need to be able to demonstrate that they are enacting their plans through best efforts.”
For companies will more than 1,000 employees, the achievement of the climate transition plan should be linked with executive remuneration.
Financial institutions will have to comply with the requirements around transition plans (and the environmental and social performance of their own operations and upstream value chain), but the sector will be exempt from broader obligations. This is expected to be formally reviewed some time next decade.
Civil Liability
The final agreement also includes a requirement for every EU Member State to make it possible for victims to bring civil cases against companies that flout CS3D.
“At the moment, cases are built on high-level expectations like the UNGPs,” says Richard Gardiner, Head of EU Policy at the World Benchmarking Alliance, referring to the UN’s Guiding Principles on Business and Human Rights. “But now there’s actually a law, which includes a list of harms, and that will hold much more weight in national courts.”
Fines and penalties
When it comes to enforcement of the law itself, the EU will give supervisors the power to sanction and fine companies up to 5% of their global turnover if they fall foul of the rules. This applies to companies headquartered outside the EU with significant operations within the bloc.
“Compliance officers will be telling boards to think twice about certain things because of that 5% figure,” said Gardiner, although he added that it remains to be seen whether supervisors will actually use their new powers to their full extent.
What now?
The agreement will be firmed up through technical meetings over coming weeks, and will probably enter into the EU’s Official Journal next Autumn. It then needs to be transposed into national law, which is estimated to take between two and four years.