New draft text for the Corporate Sustainability Due Diligence Directive proposal (European Parliament)

Our key takeaway: We are on to the next step of regulated human rights and environmental due diligence. On Tuesday 25 April, the European Parliament's Legal Affairs Committee (JURI) voted to adopt a report containing updated draft text for the European Commission’s proposal for a Directive on corporate sustainability due diligence. The report, reflecting compromise and consensus between MEPs, received 19 votes in favour, 3 votes against and 3 abstentions. While there are welcome changes that would strengthen the draft Directive—for example, the inclusion of the financial services sector, the wider scope of companies covered, new rules on sanctions for non-compliance, mandatory corporate climate transition plans, and more—as always the devil is in the details. There are some remaining gaps in the draft text, notably the exclusion of downstream stages of the value chain (product use and services); corporate climate requirements that aren’t in alignment with the European Parliament’s own climate goals; and a lack of specificity around the “when" and “how" of stakeholder engagement, especially with indigenous peoples, human rights and environmental defenders and other affected people. Civil society organisations have also pointed to some weaknesses in the underlying legal landscape that could make access to justice more difficult. As the next step in the process, the European Parliament will continue to finalise its position on the proposed draft Directive during during 31 May-1 June plenary sessions before entering into negotiations with member state governments in the EU Council.

On Tuesday 25 April, the European Parliament's Legal Affairs Committee (JURI) voted to adopt a report containing updated draft text for the European Commission’s proposal for a Directive on corporate sustainability due diligence. Some of the changes:

• Scope: The proposal applies to a greater number of companies than the European Commission proposal: EU-based companies with more than 250 employees and a worldwide turnover higher than 40 million euro; parent companies over 500 employees and a worldwide turnover higher than €150 million; and non-EU companies with a turnover higher than €150 million if at least €40 million was generated in the EU. The directive provides for a staged application, depending on the size of the company.
  

• Value chain coverage: After some public debate, JURI opted to exclude the downstream use of products or services from the scope. Specifically, this means that the rules would still apply from the production to the sale, distribution and waste management of products or services. (Note: this is a different value chain coverage than the UNGPs and has triggered extensive debate, see for instance this from Amnesty International).
  

• Inclusion of financial service providers: Financial services are included within the scope of organisations falling under the proposal’s scope, though other financial actors like institutional investors and asset managers are not explicitly included. The value chain for financial services would be limited to activities of clients directly receiving financial services. (Note: this has triggered debate, for instance, see here from NGO Finance Watch calling for a more stringent definition of the financial services value chain.)
  

• Sanctions, liability and access to justice: JURI’s agreed text would hold companies liable for damages under the authority of EU governments. The text also suggests fines for non-compliant companies of at least 5% of their net worldwide turnover. Parent companies would continue to be protected from automatic liability for the actions of their subsidiaries. (Note: this is the subject of much debate, with organisations arguing for a reversal of the burden of proof, so that the companies have to prove they’ve met their due diligence obligations.)
  

• Corporate climate transition plans: The draft text includes a provision that company directors would be expected to implement corporate transition plans compatible with a global warming limit of 1.5°C. For some large companies (those with more than 1,000 employees), the proposal would enforce direct responsibility of individual company directors, which in turn could impact their compensation, including bonuses. (Note: here is some commentary on this. The European Coalition for Corporate Justice (ECCJ) warns that these “corporate climate responsibilities fall far short of the recommendations by the Parliament’s own environmental committee. Given the worsening climate and environmental crises, politicians must take future-oriented decisions –to ensure corporate action on climate and biodiversity.” FOEE, while welcoming “tougher requirements” on climate, cautions that the discrepancy between European climate rules “creates loopholes for companies to argue they do not have to put concrete emission reduction targets in place for 2030 and 2050.”)
  

• Stakeholder engagement: The text includes obligations for companies to engage with people affected by their activities, including human rights and environmental defenders. It would also require companies to adopt a grievance mechanism. (Note: According to a coalition of over 20 NGOs, the text does not go far enough - for instance in protecting the special rights of indigenous peoples and the rights of other land-dependent communities - while the EU’s own Human Rights Defenders Mechanism “is facing a dramatic increase in requests for emergency aid caused by human rights violations linked to encroachment of corporate farming, mining and other activities onto lands occupied by Indigenous and local communities.”)
  

• Harmonisation provision: In an effort to ensure a level playing field for companies, the draft text includes a harmonisation provision that would prevent EU member states from introducing due diligence requirements more stringent than those under the EU Directive. This would be subject to changes six years after the Directive’s entry into force. (Note: this is also subject to commentary - see for instance here from the World Benchmarking Alliance noting this approach could lead to a “race to the bottom” by creating a ceiling for company performance on due diligence.)