The Council of the European Union and the EU Corporate Sustainability Due Diligence Directive

Our key takeaway: Last week, Lara Wolters, the Rapporteur on the EU Parliament’s Committee of Legal Affairs, released proposed amendments to the EU Corporate Sustainability Due Diligence Directive. We noted that the UNGPs look good on the legal page! This week, the European Council have published its negotiation position on the same. While it is considerably further from fully reflecting the UNGPs than Lara Wolter’s proposition, it does include steps towards the UNGPs compared to the proposal by the EU Commission. Perhaps most importantly, the EU Council proposes moving away from the concept of “established business relationships” to define the scope of due diligence. Instead, the EU Council introduces a form of half-value chain concept, which mainly is directed to companies’ supply chains and a risk-based approach to prioritisation of action, reflecting the severity concept in the UNGPs. Leaving out other business relations, however, means that, among other things, potential harm to people and the environment from using companies’ products and services, would generally fall outside of companies’ due diligence obligations. We also anticipate many companies will find it helpful that the Council proposes that companies will be able to perform substantial due diligence activities at group level. All eyes are now ready for the EU Parliament’s position and the upcoming Parliament-Council negotiations:

On 30 November, The Council of the European Union adopted its negotiating position to the EU Corporate Sustainability Due Diligence Directive. It provides the Council presidency with a mandate to start negotiations with the European Parliament about a final legislation.

• ‍A phased-in approach to companies in scope: The Council has agreed on an approach whereby three years after coming into force, the Directive would apply to very large companies with more than 1,000 employees and EUR 300 million net worldwide turnover, or, for non-EU companies, EUR 300 million net turnover generated in the EU. The Directive would thereafter come into force for other companies in scope in one or two additional year(s) after its entry into force, depending on type and size of company. The Council also proposes that companies should be allowed to fulfil some of its due diligence obligations at group-level.‍
• Abandoning the concept of “established business relationship” proposed by the EU Commission and introducing a risk-based approach: The Council has agreed to abandon the concept of “established business relationship” proposed by the EU Commission. A new concept, “chain of activities” replaces the Commission’s use of the value chain approach. The Council’s proposal sets out that companies in scope should perform due diligence concerning its own activities and the activities of those of their direct and indirect business partners that “design, extract, manufacture, transport, store and supply raw material, products, parts of products, or provides services to the company that are necessary to carry out the company’s activities” (by introducing the new concept of “chain of activities”, the Council means “leaving out the phase of the use of the company’s products or provision of services entirely”). Furthermore, the Council’s agreed proposal introduces a new clause requiring companies to prioritise addressing adverse impacts based on severity and likelihood when it is not possible to address all adverse impacts at the same time. The notion of “severity”, the Council suggests, shall be assessed based on the gravity of the impact, number of people or extent of environment affected, and the difficulty to restore the situation that was prior to the impact. The Council has in principle based its proposal concerning companies’ obligation to act on the cause, contribute and linkage concepts under the UNGPs. ‍
• Provisions on directors’ duties are abandoned: The Council proposes deleting the proposal by the EU Commission to link the variable remuneration of directors to their contribution to the company’s business strategy and long-term interest and sustainability. The Council furthermore proposes deleting the other provisions in the Commission’s proposal concerning executive and non-executive directors’ duty of care.