Deal on the Corporate Sustainability Due Diligence Directive
The Council of the European Union on 15 March 2024 reached a final deal on the proposal for a directive of the European Parliament and of the Council on corporate sustainability due diligence (see here and here for previous analysis on the proposal hosted on this blog).
The deal comes after a series of meetings following a provisional political agreement reached at Council level and the European Parliament’s negotiating position, both reported here.
After the approval by the Permanent Representative Committee, the Presidency of the Council has transmitted the final compromise text to the Chair of the European Parliament Committee on Legal Affairs (JURI). On 19 March 2024, the Legal Affairs Committee of the European Parliament adopted the text, agreed with the Council.
The draft agenda for the plenary sittings of the European Parliament schedules the vote on the corporate sustainability due diligence directive for 24 April 2024.
The key provisions of the directive, as it results from the latest changes, are summarized below.
Subject Matter
The directive deals with obligations for companies regarding human rights and environmental impacts, including those of subsidiaries and business partners, and the operations carried out by their business partners in companies’ chains of activities, as well as liability for violations and the requirement to adopt a transition plan for climate change mitigation.
While doing so, the text ensures that it does not lower the existing level of protection for human, employment, and social rights, environmental protection, or climate protection provided by Member States’ laws or applicable collective agreements.
Finally, the directive does not override obligations under other EU laws in areas such as human rights, employment, social rights, environmental protection, and climate change. If there is a conflict between the directive and another EU law pursuing similar objectives with more extensive obligations, the latter prevails.
Scope
The proposed directive applies to (a) companies formed in accordance with the law of a Member State, where they meet certain criteria; these include having over 1000 employees on average and a net worldwide turnover exceeding EUR 450 million in the last financial year; the directive also applies to to ultimate parent companies whose subsidiaries meet these thresholds and those engaged in franchising or licensing agreements within the EU, provided certain conditions regarding royalties and turnover are met; (b) companies governed by the law of a third country, whenever specific conditions are fulfilled; among other things, they must have generated a net turnover exceeding EUR 450 million in the Union in the preceding financial year or being the ultimate parent company of a group meeting this threshold; additionally, companies engaged in franchising or licensing agreements within the Union, with royalties exceeding EUR 22.5 million, fall within the scope if the directive if their net turnover in the Union exceeds EUR 80 million in the preceding financial year.
An exemption is provided for ultimate parent companies primarily engaged in holding shares in operational subsidiaries without making management decisions.
It is specified that the number of part-time employees must be calculated on a full-time equivalent basis for the purposes of determining company eligibility. Additionally, temporary agency workers and other non-standard workers meeting the criteria established by the Court of Justice must be included in the calculation as if they were directly employed by the company. Furthermore, if a company meets the eligibility conditions outlined before, the proposed directive applies only if these conditions persist for two consecutive financial years. However, the directive ceases to apply to a company if it no longer meets the eligibility criteria for each of the last two relevant financial years.
Definitions
The directive comes with several definitions, including the following.
The term ‘company’ is understood to refer to any entity falling under the following categories: (i) a legal entity established in one of the legal structures outlined in Annex I and Annex II of Directive 2013/34/EU; (ii) a legal entity established under the legislation of a third country in a structure similar to those listed in Annex I and II of Directive 2013/34/EU.
An ‘adverse human rights impact’ denotes a detrimental effect on individuals stemming from: (i) the violation of any of the human rights delineated in Annex I, Part I Section 1, as outlined in the international agreements referenced in Annex I, Part I Section 2; (ii) the infringement of a human right not specified in Annex I, Part I Section 1, but covered by the human rights agreements listed in Annex I, Part I Section 2, provided some criteria are met. An ‘adverse impact’ encompasses adverse environmental effects and adverse human rights impacts. The impact is understood to be ‘severe’ when it is significant due to its nature, such as causing harm to human life, health, or liberty, or due to its scale, scope, or irreversibility.
A ‘business partner’ refers to an entity: (i) engaged in a commercial agreement with the company concerning its operations, products, or services, or to which the company offers services (‘direct business partner’); (ii) involved in business activities related to the operations, products, or services of the company, even if not directly engaged in a commercial agreement (‘indirect business partner’).
The ‘chain of activities’ encompasses: (i) the activities of a company’s upstream business partners involved in producing goods or providing services, including design, extraction, sourcing, manufacturing, transportation, storage, and supply of raw materials, products, or components, as well as product or service development.; and (ii) the activities of a company’s downstream business partners related to product distribution, transportation, and storage, conducted for or on behalf of the company, excluding distribution, transportation, and storage subject to export control regulations under Regulation (EU) 2021/821 or export controls pertaining to weapons, ammunition, or war materials post-authorization of product export.
Level of Harmonisation
Member States may not introduce provisions within the scope of the directive that lay down human rights and environmental due diligence obligations diverging from those resulting in specified provisions of the directive. An example illustrating this concept is Article 7(1) of the directive stating that Member States are responsible for ensuring that companies adopt suitable measures to either prevent or, if immediate prevention is not feasible, effectively mitigate potential adverse impacts. This provision mandates the consideration of specific factors to assess the adequacy of these measures. Member States, instead, are free from introducing, in their national law, more stringent provisions. Drawing from the precedent set by this provision, Member States could provide for such an obligation, or factors to assess the adequacy of the preventive measures, more specific in terms of the objective or the field covered, in order to achieve a different level of protection of human, employment and social rights, the environment or the climate.
Due Diligence and Related Obligations
Member States must ensure that companies undertake risk-based human rights and environmental due diligence. This includes integrating due diligence into policies and risk management systems, identifying and prioritizing adverse impacts, preventing and mitigating impacts, providing remediation, engaging stakeholders, establishing notification mechanisms and complaints procedures, monitoring effectiveness, and publicly communicating on due diligence.
Companies are allowed to share resources and information within their groups and with other legal entities for due diligence purposes. Business partners are not required to disclose trade secrets to compliant companies but must disclose information necessary to identify potential adverse impacts. Companies must retain documentation demonstrating compliance for at least 5 years or until the conclusion of any ongoing proceedings.
Parent companies falling under the proposed directive can fulfil due diligence obligations on behalf of subsidiaries if this ensures effective compliance. Subsidiaries must cooperate with the parent company, integrate due diligence into their policies, continue appropriate measures, seek contractual assurances, and comply with transition plans for climate change mitigation.
Due diligence requirements must be integrated into the concerned companies’ policies and risk management systems.
Supervisory Authorities
Member States must designate one or more supervisory authorities to oversee compliance with national provisions. The competent supervisory authority for companies formed under Member States legislation is that of the State of registration. For third-country companies, the competent authority is that of the Member State where the company in question has a branch or, if not applicable, where it generated most of its net turnover in the EU.
Supervisory authorities must publish annual reports on their activities and have adequate powers and resources to carry out investigations and inspections related to compliance with the directive. Supervisory authorities may initiate investigations and inspections, order corrective actions, impose penalties, and adopt interim measures to address non-compliance. These powers can be exercised directly, cooperatively, or through judicial authorities, ensuring effective legal remedies for affected parties. Decisions by supervisory authorities do not affect a company’s civil liability under the directive.
Penalties
Member States must establish rules on penalties, including pecuniary penalties, for breaches of national provisions derived from the proposed directive, ensuring they are effective, proportionate, and dissuasive. When determining penalties, factors considered include the nature, gravity, and duration of the breach, impacts resulting from it, investments made, collaboration efforts, previous infringements, remedial actions, financial gains or losses, and other relevant circumstances.
Penalties must include pecuniary penalties and, if the company fails to comply, public statements about the infringement. Pecuniary penalties are based on the company’s net worldwide turnover, with a maximum limit set at not less than 5% of the company’s net worldwide turnover in the preceding financial year.
Member States ensure that decisions containing penalties are published, publicly available for at least 5 years, and shared with the European Network of Supervisory Authorities, without including personal data.
Civil Liability of Companies and a Right to Full Compensation
Companies can be held liable for damages caused to natural or legal persons if: (a) they intentionally or negligently failed to comply with the obligations under the proposed directive; (b) and, as a result, a damage to the person’s legal interests protected under national law was caused. A company cannot be held liable if the damage was caused only by its business partners in its chain of activities.
If held liable, natural or legal persons have the right to full compensation for damages under national law, ensuring no overcompensation.
Member States must ensure: (a) limitation periods for damages actions are reasonable, starting after the infringement ceases and the claimant becomes aware of it; (b) costs of proceedings are not prohibitively expensive for claimants; (c) claimants can seek injunctive measures and authorize certain organizations to bring actions; (d) courts can order disclosure of evidence by companies when necessary for a claim, ensuring proportionality and protection of confidential information.
Participation in industry or multi-stakeholder initiatives or third-party verification does not exempt companies from liability.
Civil liability of companies does not affect subsidiaries or business partners’ liability, and joint liability applies when damage is caused jointly.
These rules do not limit companies’ liability under other legal systems and are of overriding mandatory application if applicable law is not that of a Member State.
Entry into Force and Transposition
The proposed directive will come into force on the twentieth day after its publication in the Official Journal of the European Union.
Member States must enact regulations and administrative provisions to comply with the directive within two years of its entry into force.
The application of these provisions varies based on company size and origin: (a) for companies formed in accordance with Member State legislation with over 5000 employees and a net worldwide turnover exceeding EUR 1500 million, measures must be applied within three years; (b) as regards companies with over 3000 employees and a net worldwide turnover exceeding EUR 900 million, within a four-year timeframe; (c) for companies formed under third-country legislation with a net turnover over EUR 1500 million in the Union, within three years; (d) for third-country companies with a turnover over EUR 900 million, within a four-year timeframe. All other companies must comply within five years.
Annex I
The lists contained in the Annex specify the adverse environmental and human rights impacts relevant for the directive, to cover (the violation of) rights and prohibitions included in international human rights instruments (Part I Section 1), human rights and fundamental freedoms instruments (Part I Section 2), and prohibitions and obligations included in environmental instruments (Part II).
Many thanks, Marco. From a PIL perspective, the most interesting provision certainly is the one that calls on Member States to make their law mandatory “if the applicable law is not that of a Member State” (Art 22(5) of the final compromise). Leaving aside the fact that this is designed to bypass the rules of European PIL, and more particularly the Rome II Regulation, the formulation is puzzling. Does this mean that the national law implementing the Directive trumps only the law of third states, but not that of other Member States? Is this then a new type of ‘relative’ overriding mandatory rule that only applies in relation to non-EU states, but not inside of the EU? And does this relativity apply also if a Member State has not fully implemented the Directive? Best wishes, Matthias
Dear Matthias,
I greatly appreciate your insightful comment, which raises important considerations.
Today, we have a final compromise text to discuss. However, to provide better context, I would like to begin by discussing the legislative journey of this rule.
Initially, in the European Commission’s proposal for the directive, Article 22(5) had a narrow focus, making only the provisions on liability overriding mandatory. However, during its first reading, the Council of the European Union precised the scope of Article 22(5) to encompass all provisions of national law transposing this Article. The European Parliament did not alter this point during its first reading. Following negotiations, the current deal confirms the modification made by the Council, resulting in Article 22(5) being presented verbatim as follows:
‘Member States shall ensure that the provisions of national law transposing this Article are of overriding mandatory application in cases where the law applicable to claims to that effect is not the law of a Member State.’
Crucially, suggestions raised have not been taken into account and, as a result, not ALL national laws transposing the directive will be mandatory in nature. This expressly. However, a different interpretative reading is hoped for. Moreover, the provision has not been revised to mandate the application of these provisions regardless of the otherwise applicable law. Instead, with the current formulation, conflicts with other overriding mandatory provisions are possible, requiring the need for challenging comparative assessments. Additionally, the text of the directive does not make any reference to EU instruments of private international law but I systematically assume that the concept of ‘overriding mandatory’ conforms to our familiar understanding.
Regarding interpretation considerations, Recital 61 is relevant. It underscores the European legislator’s intent to give imperative status to provisions on civil liability when the law applicable to such claims is not that of a Member State. This situation may arise, for instance, under private international law rules when damage occurs in a third country.
Coming to your question, let us start from the fact that the national law implementing this Article of the directive trumps the law of third States. This is also part of the more general current trend to expand the scope of EU law as against that of third national law.
While regarding the interaction between different implementing laws, if both the lex fori and the lex causae are laws of Member States, the directive appears silent on the matter, at least from a (soon) positivized perspective. This silence is noteworthy, especially considering that other EU directives of the most recent ‘generation’, such as Directive 2011/83/EU (Consumer Rights Directive), explicitly address conflicts between mandatory rules of the consumer country and the chosen law of Member States. It expressly deals with the problem of greater or lesser protection in the case of mandatory rules of the consumer country and the chosen law where, both EU Member States’ law, are subject to a different EU private law harmonization. It intervenes in its Article 4, which provides that Member States shall not maintain or introduce, in their national law, provisions diverging from those laid down in the Directive, including MORE or LESS stringent provisions to ensure a different level of consumer protection.
Therefore, the absence of similar considerations in this directive favours your intriguing reasoning regarding the relative nature of this overriding mandatory rule.
Considering the combination of other provisions of the directive with Article 22(5), challenges persist. Article 3(a) of the directive addresses the level of harmonization but specifically refers to obligations diverging from those in specific Articles (i.e. those laid down in Articles 6(1), 6(1a), 7(1) and 8(1)). Moreover, Article 1(3) deals with conflicts between the directive and another Union legislative act, rather than different treatment of laws of Member States.
Implicitly, however, I think that the directive may provide unilateral elements that, when combined with bilateral conflict rules of EU private international law, could resolve many issues. However, this is all subject to discussion!
Regarding incorrect implementation of the directive, the issue becomes even more complex. Relying directly upon the directive in a hypothetical dispute between private parties may not offer a straightforward solution due to potential preclusion of its direct horizontal effects. Nevertheless, EU courts seized with such cases may have interpretative flexibility. I believe Article 22(5) assumes the correct implementation, and its scope should ideally be self-limited in cases of incorrect implementation.
Lastly, it’s worth noting that the directive may also play a role in contractual contexts. For instance, in a contractual relationship between a manufacturing company and a component supplier, compliance with the directive may be contractually mandated. Failure to conduct adequate due diligence, resulting in sourced components arising out of unethical labour practices and environmental degradation, could constitute a breach of contract causing reputational damage and financial losses.
These discussions are amazing, and I really appreciate your engagement on this matter.
Best wishes (and see you soon),
Marco
Matthias, I would add one question to your list. Article 22(5) asks Member States to treat the provisions of “national law” transposing the directives’s rules on civil liability as overriding mandatory provisions: OK, but which national law? Their own, one would be tempted to say. This would mean that the courts of Member State A will apply the provisions whereby A implemented the directive, whereas the courts of Member State B will do the same with the provisions enacted in B. If my understanding is correct, the former set of provisions may differ from the latter, to some extent. Now, situations exist where a company established and operating in A may be sued in B (e.g., pursuant to Article 8 of the Brussels I bis Regulation). That company will then see its liability assessed (as regards the issues covered by the directive) against the standards of B (and against the standards of Member State C if sued in C, of D if sued in D, etc.). Is this how Article 22(5) should be understood? If so, is this an efficient solution? Or should the seised court rather apply the national provisions of the “competent” Member State, which may be a State other than the forum State? If so, how is such “competent” State to be determined?
Dear Pietro,
many thanks for your insightful contributions, which add depth and significance to our discussions.
If I understand correctly, your query revolves around to what rules are referred to by Article 22(5) of the directive when conferring overriding mandatory nature to provisions of ‘national law’ transposing its rules. Indeed, it is conceivable that a scenario may arise where a dispute is initiated in France against a French company, and an Italian company is brought in the same proceedings relying upon Article 8 of Brussels I bis. In such a context, a pertinent question arises regarding whether the overriding mandatory nature conferred by Article 22(5), from the perspective of the French court seized, refers to the French implementing provisions or to the national provisions of the ‘competent’ Member State, as you defined them, particularly vis-à-vis the Italian company.
You are absolutely correct.
The question indeed becomes more intricate because Article 22(5) of the directive encompasses not only rules that could be categorized as purely substantive (such as those pertaining to liability and its extension) but also addresses borderline aspects like the limitation period or disclosure of evidence.
At this moment I do not have an answer. Rather than rushing to resolve this question, however, I find myself contemplating why we are grappling with these issues before the directive’s adoption, entry into force, and implementation. Despite warnings and suggestions about the not clear wording of Article 22(5), the Union legislator chose to proceed on, recognizing the directive’s aim of achieving minimal harmonization across Member States’ laws. While tactical litigation dynamics may exploit ambiguities in such a (future) context, it is essential to recognize that mutual trust underpins EU Member States’ relations. In this context, EU Member State courts possess the necessary tools and interpretative capacity to manage disputes dealing someway with the directive. Perhaps we should also try to overcome, on the legislative side, the need to provide overly prescriptive guidance (mini-step by mini-step), as Member States’ courts are well equipped to deal with such situations.
Thank you once again, Pietro, for your insightful contributions to our discussions.
Marco