Corporate Sustainability Due Diligence Directive in Doubt

We recently noted the significant political milestone that the proposed Corporate Sustainability Due Diligence Directive (the Diligence Directive) achieved on 14 December 2023, when it was announced by press release by both the Council and the European Parliament that political agreement had been reached in respect of the proposed directive.

The Diligence Directive was scheduled to be voted on by the EU Council on 9 February 2024. This would have paved the way for adoption of the Diligence Directive by the European Parliament. However, when reports that Germany, Italy and Estonia intended to abstain from the vote raised the spectre that a qualified majority required for the initiative to proceed would not be reached, the vote was postponed leaving supporters of the initiative scrambling to avoid the prospect of the proposed directive failing to become law. A qualified majority requires 55% of Member States, representing at least 65% of the EU’s population to vote in favour of adopting a measure.

A Belgian news source quoted a leaked letter by the German Federal Minister of Justice Dr. Marco Buschmann MP to German business associations which raised concerns that the Diligence Directive in its proposed form would entail undue administrative burdens for business, basing this view on Germany’s experience with its Supply Chain Act (Lieferkettensorgfaltspflichtengesetz) and on the breadth of the civil liability contemplated by the proposal. Fellow FDP (Freie Demokratische Partei) member and German Federal Minister of Finance Christian Lindner MP is quoted as saying “Germany is obviously anything but alone in its concerns” upon reports of further abstentions from the vote. The FDP is broadly seen as pro-business and is having an impact on Germany’s role in the EU. Germany’s support is seen as very important to the success of the Diligence Directive.

The postponement of the vote on the Diligence Directive was greeted with concern among environmental NGOs and climate activists who had welcomed the recent political agreement to progress the proposal.  

A reminder of the key (intended) provisions of the Diligence Directive is set out below.

Obligations

The Diligence Directive, it is anticipated, will:

  • impose obligations on in-scope companies to “identify, assess, prevent, mitigate, bring to an end and remedy” adverse human rights and environmental impacts, by applying due diligence to their own operations, and those of their upstream and downstream partners “including production, supply, transport and storage, design and distribution”. It is specifically noted that companies that identify adverse impacts on human rights or the environment by some of their business partners may have to terminate relationships where these impacts cannot be prevented or ended.
  • require companies to “communicate meaningfully” with those affected by their actions, including by introducing a complaints mechanism in relation to their due diligence policies and monitoring their effectiveness.
  • oblige companies to adopt and put into effect a transition plan for climate change mitigation in line with the Paris Agreement to keep man-made global warming to below 1.5˚C, with companies with over 1,000 employees required to ensure that their management receive financial benefit for implementing this plan.

Scope

The Diligence Directive is expected to apply to EU companies that have over 500 employees and a net worldwide turnover of at least €150 million.

Liability

Significantly, the proposed directive contemplates both large administrative fines and a specific civil liability regime for breach of its provisions providing a direct cause of action for third parties.

Looking ahead

A development of this nature throws the future of the Diligence Directive into doubt. It is hoped that such a key initiative can be salvaged by political negotiations, although this may affect the timeline in respect of the proposal. Reports indicate that the EU Council vote will go ahead as soon as 14 February 2024. We will continue to monitor developments in respect of the proposed directive with interest.

For more information in relation to this topic, please contact Liam Murphy, Senior Knowledge Lawyer or any member of ALG’s Corporate and M&A team.

Date published: 13 February 2024