Lawmakers in the European Parliament voted 374 to 235 to adopt the Corporate Sustainability Due Diligence Directive (CSDDD), a key piece of legislation setting mandatory obligations for companies to address their negative impacts on human rights and the environment, clearing a major hurdle towards the implementation of the new law, which came into significant doubt when an earlier version failed to gain approval by member states in the EU Council.
The revised CSDDD, which significantly scales back the number of companies covered by the law, and extends the timeline to full implementation, must now be formally approved by the Council before it can enter into force.
The adoption of the revised CSDDD by Parliament follows a four-year process to advance the regulation, beginning with studies by the European Commission in 2020 on directors’ duties and sustainable corporate governance and on due diligence requirements in the supply chain, leading to the Commission’s proposed CSDDD draft in February 2022, setting out obligations for companies to identify, assess, prevent, mitigate, address and remedy impacts on people and planet – ranging from child labor and slavery to pollution and emissions, deforestation and damage to ecosystems – in their upstream supply chain and some downstream activities such as distribution and recycling.
The law also requires companies to adopt transition plans to align their businesses with the Paris Agreement goal with limiting global warming to 1.5°C, and mandates member states to put in place supervisory authorities to investigate and impose penalties on non-complying firms.
After Parliament and Council had reached an agreement on the new legislation, sending the directive for final approval by each body, however, the approval vote in Council was postponed in January after Germany threatened to not support the regulation on concerns of the bureaucratic and potential legal impact it would have on companies, with its success then thrown into further doubt when Italy reportedly also subsequently pulled its support, ultimately failing to pass in late February after a last minute effort by France to significantly scale back the scope of the new rules to only the largest companies in the EU.
Following some significant compromises on the legislation, member states in the Council finally approved the CSDDD last month. The revised CSDDD significantly scaled back the number of companies by raising the thresholds of those covered by the new legislation to 1,000 employees, up from 500, and to those with revenue greater than €450 million, up from €150 million. The new thresholds would cut back the number of companies in the scope of the CSDDD by roughly two thirds. Lower thresholds that had been in place for high-risk sectors were also removed, with the possibility to be reconsidered later.
Additional changes to the CSDDD included phasing in the legislation, beginning with companies with over 5,000 employees and revenue greater than €1.5 billion in 2027 followed by companies with more than 3,000 employees and €900 million revenues in 2028, and for all other companies in the scope of the law in 2029. The revised CSDDD also removed the requirement for companies to promote the implementation of climate transition plans through financial incentives.
Following the vote, lead MEP Lara Wolters said:
“Today’s vote is a milestone for responsible business conduct and a considerable step towards ending the exploitation of people and the planet by cowboy companies. This law is a hard-fought compromise and the result of many years of tough negotiations.”
Mark founded ESG Today following a 20 year career in investment management and research. Prior to founding ESG Today, Mark worked at Delaney Capital Management (DCM) in Toronto, Canada, most recently as the firm’s head of U.S. equities. While at DCM, Mark was part of the firm’s ESG team, responsible for evaluating and tracking the sustainability factors impacting portfolio companies, and assessing the suitability of companies for portfolio inclusion. Mark also spent several years in the sell-side research industry, covering the technology and services sectors. Mark holds an MBA from Columbia University in New York, a BBA from the Schulich School of Business at York University in Toronto, and is a CFA charterholder.