EU Parliament Finalizes Position on Upcoming Corporate Sustainability Due Diligence Rules

Background

On June 1, 2023[1], the European Parliament (EU Parliament) adopted its position on the proposed Corporate Sustainability Due Diligence Directive (“CSDDD”).[2] The European Commission (Commission) published the initial proposal for the CSDD on February 23, 2022 (EC Proposal). The Council of the European Union (“Council”) thereafter, adopted its own position on the proposal in November 2022. The CSDDD will now be subject to negotiations between the EU Parliament and Council before it is adopted.

Once implemented, the CSDD will require covered companies to conduct due diligence on and assume accountability for actual and potential violations of human rights and environmental damage caused throughout their value chains.

Key Charges

The EU Parliament’s position generally expands the application of the CSDDD for greater coverage, enforcement, and monitoring than the EC Proposal and Council’s position. Some of the key changes proposed by the EU Parliament include:

Increased coverage

The EU Parliament lowers the threshold criteria in terms of the number of employees and turnover required for the application of CSDDD compared to both the EC Proposal and the Council’s position. Additionally, the EU Parliament proposes that for the purposes of determining applicability thresholds, employees would include workers in “all non-standard forms of employment” [3] in addition to part-time and agency workers already covered in the EC Proposal.

In summary, the revised thresholds proposed by the EU Parliament are as follows:

Type of company	No. of Employees	Turnover
Individual EU Companies[4]	>250 employees on average[5]	Worldwide turnover >40 million € in the past financial year[6]
An EU company that does not meet the above criteria but is the ultimate parent company[7] of a group that has[8]	>500 employees on average	Worldwide turnover >150 million € in the past financial year
Individual Non-EU Companies[9]	N/A	Worldwide turnover of more than EUR 150 million, with at least EUR 40 million[10] generated in the European Union in the year preceding the past financial year.
A non-EU company that does not meet the above criteria but is the ultimate parent company of a group that has[11]	>500 employees on average	Worldwide turnover of more than EUR 150 million, with at least EUR 40 million generated in the European Union in the past financial year

When considering the threshold turnover produced by non-EU companies in the EU, it is important to note that the EU Parliament has proposed that such calculation encompass the turnover derived from third-party companies that have engaged in a vertical agreement with the company and/or its subsidiaries within the EU, in exchange for royalties.[12]

Expanded value-chain

As compared to the EC Proposal which focused primarily on the production of the goods, the European Parliament’s position explicitly clarifies that the scope of the value chain for which such diligence is to be carried out, extends also to the sale, distribution, transport, and waste management of the product.[13]

Scope of impact

The EU Parliament limits the scope of due diligence obligations of a company to impacts that are (i) caused, (ii) contributed to, or (iii) directly linked to company operations and those of their subsidiaries, and the operations carried out by entities in their value chain with whom the company has a business relationship.[14]

In contrast, the EC Proposal does not make any explicit qualification as to the role of the company and simply refers to adverse impacts from any entity in the company’s value chain with whom the company has an established business relationship.

Accordingly, the EU Parliament appears to limit the liability of companies against those scenarios where an impact may be too remote.

Precise due diligence requirements

Article 5 of the EC Proposal mandates companies to integrate due diligence into all corporate policies and have in place a due diligence policy that is updated annually.

The EU Parliament’s proposal further defines the contours of such due diligence policy and incorporates stronger language in general with respect to a company’s obligations. Notably, the EU proposal introduces new requirements concerning proportionality. The EU proposal requires companies to carry out a due diligence policy that is proportionate and commensurate to the likelihood and severity of their potential adverse impacts as well as their specific circumstances and risk factors, including their sector of operation and size. The EU Parliament proposal hence seeks to place higher standards of due diligence on higher-risk companies.[15]

Further, the EU Proposal also introduces specific requirements for companies operating in high-risk areas such as areas in a state of armed conflict or post-conflict to ensure that they comply with the obligations under international humanitarian law. [16]

Expanded mitigation requirements

Articles 7 and 8 of the CSDDD require Member States to ensure that companies prevent and mitigate potential adverse impacts and bring actual adverse impacts to an end.

The EU Parliament’s proposal requires companies to prioritize the order in which they take appropriate measures on the basis of the likelihood and severity of adverse impacts. The EU Parliament also identifies the various types of measures that may be taken to remediate the adverse impact of their operations. These include compensation, restitution, rehabilitation, public apologies, reinstatement or a contribution to investigations.^[17] The EU Parliament and also places obligations on companies to engage in consultations with affected groups in order to mitigate and redress adverse impacts. [18]

Stronger grievance redressal

As compared to the EU Commission proposal that provides for the “possibility” of people to submit complaints to the designated supervisory authority (which will be set up in the future by Member States), the EU Parliament proposal recommends a publicly available notification and non-judicial grievance mechanism under Article 9 that can be used by any person to raise grievances and request remediation.[19]

Additional penalties

The CSDDD requires Member States to establish supervisory authorities and impose penalties for non-compliance.

The EU Parliament’s proposal expands the scope of penalties to include removing the offender’s goods from sale or export, releasing a public statement indicating the company as responsible for an infringement,[20] and for non-EU companies, banning participation in public procurement in the EU.[21] The EU Parliament has also proposed that the maximum limit of any fine imposed by supervisory authorities should not exceed 5% of the company’s worldwide turnover. [22]

Timelines

The draft CSDDD will now be subject to negotiations between the EU Parliament and Council, with an agreement expected by the end of 2023.[23] It is expected that 2026 will be the first year wherein EU companies meeting the threshold of employees and turnover would be required to comply. International companies with the relevant EU turnover are expected to be required to comply with the regulation by 2027[24].

How will Indian Businesses be affected?

The regulations will directly impact Indian firms operating in Europe that meet the minimum employee/turnover criterion. European businesses would also seek information on their Indian suppliers’ sustainability practices to meet their relevant due diligence requirements. As part of compliance, companies (covered by the proposed regulation) may potentially end business relationships with entities whose actions have an adverse impact on human rights and the environment.Once adopted as a law, covered businesses that do not already conduct sustainability due diligence, can expect increased compliance costs including costs towards changing company’s own operations, value and supply chains to comply with the due diligence obligations, if needed.

Indian companies with linkages to large firms in the EU, that would be subject to the CSDDD, may also need to examine their own internal practices in terms of not only their due diligence practices but also their actual impact on the environment and human rights.

We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:
Sanjay Notani, Partner – Email – SanjayNotani@elp-in.com
Parthsarathi Jha, Partner – Email ParthJha@elp.in.com
Naghm Ghei, Principal Associate – Email – NaghmGhei@elp-in.com
Mitul Kaushal, Consultant – Email – MitulKaushal@elp-in.com

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein

References:

EU Parliament Finalizes Position on Upcoming Corporate Sustainability Due Diligence Rules

Jul 11, 2023