Will it be the EU Corporate Sustainability Due Diligence Directive 2023, or 2024?
The European Parliament's Legal Affairs Committee is set to vote on the proposed Corporate Sustainability Due Diligence (CSDD) directive next week after MEPs reached an agreement on the directive on the night of April 18th, 2023 (see my earlier post announcing the political breakthrough). This agreement suggests it is possible this Directive will emerge in 2023. But, given the summer, and the Council, maybe early 2024 is a safer bet.
As you have seen in my earlier posts, the CSDD Directive aims to ensure that companies respect human rights and the environment in their operations, and the MEPs' compromise yesterday aims to extend the directive's scope to more companies.
(A quick note here to the wise. The CSDD is an EU Directive, not an EU Regulation, so it is the weaker of the two legislative powers the Parliament has. A Directive gives member states several years to develop their own national law reflecting the Directive and have been known to really drag that out. A Regulation is instantly building equally on all member states, so is far more powerful. So, even when the CSDD Directive emerges out of the sausage machine as an actual sausage, maybe 2023, maybe 2024, it would not be until 2026 or 2027 before member states – especially those like Sweden who are generally opposed to it – do anything about it.)
Reporting Thresholds.
As you would know by now, one of my favourite things to talk about is reporting thresholds. According to Euractiv’s coverage of the new draft, it would apply to EU companies with more than 250 employees on average and a net worldwide turnover of more than €40 million and “ultimate parent companies” of a group with 500 employees and a net worldwide turnover of over €150 million. Non-EU companies that generated at least €40 million in the Union would also be affected. Financial services, including asset managers and institutional investors, are included in the directive's scope.
It is difficult to estimate the exact number of companies that would fall under the proposed reporting thresholds as it depends on various factors such as the industry, location, and size of the companies. However, we can make a rough estimate based on some statistics. According to Eurostat, there were 190,383 companies in the European Union with 250 or more employees in 2018. However, not all of these companies would meet the proposed reporting thresholds as they would also need to have a net worldwide turnover of more than €40 million.
Similarly, according to Eurostat, there were around 9,000 "large" enterprises with 500 or more employees in the European Union in 2018. Again, not all of these enterprises would meet the proposed reporting thresholds as they would also need to have a net worldwide turnover of over €150 million. If you want to put that number of companies into perspective, there are around 30 million companies in the EU, so that 9000, or 3%, is looking a little wan.
As for non-EU companies, the European Commission estimated in its original CSDD proposal that around 6,000 non-EU companies would be affected by the proposed rules, based on data from the OECD. These companies would need to have generated at least €40 million in the EU.
It's worth noting that these are rough estimates and the actual number of companies affected could be higher or lower. It is definitely also worth noting that IMHO there is no way the Council let’s this through with these numbers. That is a big business battleground and that huge lobby won’t likely relent.
The MEPs agreed yesterday on the rules to be applied from the production to the sale, distribution and waste management of products or services provided by a company, leaving out due diligence and liability provisions regarding the use of products or services. Civil society organisations have expressed concern over this exclusion, while business representatives have argued that including it would excessively burden companies. The implementation timeline for the rules depends on the size of the companies. The rules would apply three years after the directive's entry into force to companies with more than 1000 employees and a €150 million turnover. Companies that do not reach the €150 million worldwide threshold can wait five years before applying the rules.
The compromise text introduces a harmonisation provision to ensure a level playing field for companies across the Single Market, with possible changes to the level of harmonisation six years after the directive’s entry into force. The provision would prevent member states from introducing more stringent due diligence rules than those provided under the EU directive. This has been criticised as it risks introducing a "race to the bottom" instead of driving up sustainability performance. This does mean the drafting of national legislation will be watched by the Commission, making sure the anti-due diligence crowd are not trying any bait and switches, and might even mean the Commission can shepherd a higher median than if the members states were left unattended; raising the naysayers beyond where they want to naturally go.
However, the Council's reply to the first draft left out sanctions for companies violating human rights. The burden of proof question has also been discussed. The CSDD directive aims to hold large companies accountable for human rights abuses and environmental violations in their value chain. The legislative process has involved industry representatives, civil society groups, and academics to ensure that the proposal is balanced and effective.
One of the most significant features of the proposed directive is the provision that requires companies to pay damages for any harm caused by their operations or products. According to the proposed directive, companies would be liable for any harm caused to people and the environment along their value chain, including their suppliers and subcontractors.
What makes this provision particularly interesting is the proposal that (and this might just be the highest % we have seen for due diligence legislation, which suggests it won't survive its passage) - companies may pay up to 5% of their global turnover as damages. This means that companies found to be responsible for serious human rights abuses or environmental damage could be held accountable for a substantial amount of money. The 5% of turnover provision has been met with both praise and criticism. Supporters argue that it will encourage companies to take their environmental and social responsibilities seriously, as they will have a financial incentive to do so. On the other hand, critics argue that the provision may be too severe, and the threat of such large fines could cause businesses to become overly cautious and avoid taking risks, which could ultimately harm innovation and economic growth.
It's important to note that the 5% of turnover provision is not a fixed penalty. Rather, it is a maximum penalty that companies may face if found to be responsible for severe harm. And, to be very frank, I don’t see it ever being used for human rights but, at least, it is the equivalent of a big muscly guy in the back of the room casting a shadow. The actual amount of damages a company may have to pay would depend on the extent of the harm caused and other factors, such as the company's ability to pay. Overall, the 5% of turnover provision is one of the most controversial aspects of the proposed directive. It remains to be seen whether it will survive the legislative process and be included in the final version of the directive.
When it comes to the direction of the burden of proof being left to the discretion of the member state, there are pros and cons to consider. On the one hand, allowing member states to determine the direction of the burden of proof can lead to greater flexibility and adaptability. Different member states may have different legal systems, cultures, and traditions that affect how evidence is assessed and who bears the burden of proof in different situations. By allowing member states to determine the direction of the burden of proof, the EU can respect and accommodate these differences, which can be particularly important in areas such as criminal law.
On the other hand, leaving the direction of the burden of proof up to member states can also lead to inconsistency and confusion. Different member states may apply different standards and criteria for determining who bears the burden of proof in similar cases, which can create legal uncertainty and undermine the principle of equal treatment. Moreover, it can be difficult to ensure that member states are applying the direction of the burden of proof in a way that is compatible with EU law, particularly given the diversity of legal systems across the EU.
In the context of the Corporate Sustainability and Due Diligence (CSDD) proposals, there are pros and cons to both placing the burden of proof on the complainant and placing it on the company.
Burden of Proof on the Complainant:
Pros:
Cons:
Burden of Proof on the Company:
Pros:
Cons:
Where you land on this will depend entirely on your point of departure. There is no obvious best approach as the sides in this debate will never agree. However, it is important to ensure that companies are held accountable for their actions and that victims of human rights abuses have access to justice and effective remedies. The real worry is the unevenness from member state to member state as to the burden of proof. For multinationals that might lead to jurisdiction shopping.
Next Steps
After the Legal Affairs Committee vote on the draft next week, the proposal will go to the European Parliament for a full plenary vote which is going to be just before the summer. If the proposal is approved by the European Parliament, it will then need to be approved by the European Council (made up of representatives of the EU member states) before becoming law. If any changes are made to the proposal during the parliamentary process, it may need to go back to the Legal Affairs Committee or be re-negotiated with the Council. The process can be lengthy, and before becoming law, while we might like to see it happen this year, it could go through many rounds and take us into 2024.
The battle will really be fought at the anti-due diligence and pro-due diligence fracture. The CSDD directive has a broad scope, and many European companies will be affected. One side wants more companies covered, one side wants less. One side wants mandatory, one side wants voluntary. One sides wants sanctions, the other doesn’t. One side wants companies to be more responsible, the other side less. One side wants complainants to prove the breach, one wants the companies. The battlegrounds are set and 2023 will see a lot more to and fro on every one of these points. It will not emerge into the light in anything like the shape of the new draft.
The only common ground in all of this is ensuring companies operate in a responsible and sustainable manner, with due diligence checks to identify, prevent, and mitigate adverse impacts on human rights and the environment. The directive's name may not be the catchiest, but in the current form is a significant development that could have far-reaching consequences for businesses operating in the EU.
Let's not forget that this directive is not just about regulations and compliance; it's about the people and the planet. The proposal strives to ensure that businesses are held accountable for their actions, and it encourages them to act in the best interests of everyone. It is a positive step forward in the fight against corporate greed and environmental degradation. But birthing corporate due diligence laws is like an Agatha Christie – there's always a twist and a surprise ending. Let’s keep watch.
?