Aligning the EU Due Diligence Directive with the International Standards (Shift)

Our key takeaway: This “is not the moment to pick and choose among the core definitions and concepts in the international standards but rather to take advantage of the common ground they provide to agree a final CS3D text.” Aligning with the core concepts and points of principle in the UN Guiding Principles and the OECD Guidelines “will make the difference between a Directive that merely incentivizes a minimum level of compliance and one that puts sustainability at the heart of how business is done.” Wise words from Shift that has released a snapshot highlighting where we are in ensuring the upcoming EU Due Diligence Directive can be meaningful, effective and valuable in advancing outcomes for people and planet. The good news? Good progress and alignment in (1) Integrating a true risk-based approach to identifying and taking action on impacts, (2) Setting different expectations for action depending on how a company is involved with an impact and (3) Separating the scope of the due diligence duty from the scope of civil liability. The not so good news? Much more work needed on (1) Ensuring that the due diligence duty applies to the full value chain, (2) Moving from a policing to partnership approach in defining how companies should prevent and address impacts, and (3) Aligning the scope of covered companies, including application to financial institutions, with existing EU reporting requirements.

Shift released ‘Aligning the EU Due Diligence Directive with the International Standards: Key Issues in the Negotiations’ (October 2023). “In this snapshot, Shift takes stock of where progress has been made – and where work still remains – to ensure greater alignment between the positions of the three EU political institutions – the Commission, Council and Parliament – and the international due diligence standards”:

• Opportunity of the directive: “The CS3D represents an unparalleled opportunity to advance outcomes for people and planet by scaling the uptake of quality due diligence and enhancing corporate accountability for due diligence failures, as noted in our response to the Commission’s original proposal. However, to realize this potential, the Directive must be firmly grounded in the international standards.” The CS3D “will provide – by definition – at least a minimum level of harmonization of national due diligence laws across the single market for companies covered by the Directive.” Requiring full harmonization with its terms by Member States “makes sense only to the extent that the CS3D itself aligns with the international due diligence standards. Otherwise, it will lead to fragmentation with current reporting requirements and with other standards of business conduct grounded in the UNGPs and OECD Guidelines. It will also constrain (rather than enable) Member States’ policy space to support, incentivize and require companies to meet their due diligence responsibilities under the international standards.” Notably: “In Shift’s view, this is not the moment to pick and choose among the core definitions and concepts in the international standards but rather to take advantage of the common ground they provide to agree a final CS3D text.” “This is even more important in light of the recent adoption by the EU of the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS)”: there will be much confusion if the conduct requirements of the CS3D diverge from these disclosure expectations. In short: “these core concepts and points of principle will make the difference between a Directive that merely incentivizes a minimum level of compliance and one that puts sustainability at the heart of how business is done.”
  

• Progress to applaud: Shift highlights three areas where there have been positive progress in the Council and Parliament positions. First: “Integrating a true risk-based approach to identifying and taking action on impacts.” It is helpful that these positions look “across all three potential modes of involvement in impacts under the international standards (ie, cause, contribution and direct linkage).” It is also helpful that they use “severity and likelihood to prioritize impacts for attention, where necessary, informed by meaningful consultation with affected stakeholders.” Second: “Setting different expectations for action depending on how a company is involved with an impact.” Here, Shift highlights the positive points in particular: it is helpful that the drafts integrate “the ‘involvement framework’ from the international standards (i.e. differentiating the action expected of a company based on the mode of its involvement)” and that they pay “greater attention to remedy for actual impacts distinct from mitigation.” Third: “Separating the scope of the due diligence duty from the scope of civil liability.” Here it is helpful that the drafts tie “civil liability to well-established concepts of a causal connection (including contributing to harm) in national law so that not every breach of the duty may give rise to liability”, and that they distinguish “the roles of administrative supervision and civil liability as complementary enforcement mechanisms.”
  

• Key areas for further alignment: There are a number of areas where further alignment is needed. These include the following three. First: “Ensuring that the due diligence duty applies to the full value chain.” Here, Shift outlines the positions. “The Commission proposed that all business relationships across a company’s value chain should be in scope for due diligence, in line with the international standards; but the Council has limited this to upstream and only some downstream relationships which would leave the most severe risks in critical sectors largely out of scope.” The Parliament in turn “has provided a more nuanced definition that would cover a wider range of relationships, in line with the international standards and with new EU sustainability reporting requirements.” Second: “Moving from a policing to partnership approach in defining how companies should prevent and address impacts.” Here Shift emphasizes that the “Parliament’s position recognizes the need for companies to consider risks connected to their own business model and strategy and any potential contribution to impacts, and to ensure that contracts with business relationships are accompanied by measures to support due diligence.” This in turn will ensure that the Directive “creates the right incentives for companies to meaningfully tackle sustainability risks rather than pointing the finger elsewhere or simply divesting from challenging relationships or contexts, leading to worse outcomes in practice.” Third: “Aligning the scope of covered companies, including application to financial institutions, with existing EU reporting requirements.” Here: “[a]t a minimum, the CS3D should align with the scope of new European sustainability reporting requirements. Better integration of core due diligence concepts, combined with recognition of how financial institutions implement due diligence in practice, can help address the concerns that are currently leading to problematic carve-outs for the financial sector.”