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On 28 February, the Council of the European Union failed to endorse the Corporate Sustainability Due Diligence Directive (CSDDD) despite a prior political agreement between the European Commission, the Council, and the European Parliament in December 2023. Initially perceived as a formality, the Council vote became uncertain due to the sudden withdrawal of German support. This led to a domino effect, with at least 12 EU Member States abstaining and Sweden voting against the directive.[1]

The primary goal of CSDDD is to shift human rights and environmental due diligence (HREDD) from soft to hard law. It requires companies to identify and address adverse impacts on human rights and the environment. Failure to do so would entail potential administrative fines up to 5% of the company's turnover, as well as the risk of civil claims against companies in EU courts, including for harm caused in subsidiaries abroad or supply chains. It was the concerns regarding fines and liability for extraterritorial harm that pushed some Member States including Sweden to argue that the obligations impose an excessive administrative burden on companies.

The Belgian presidency of the EU has indicated that it will look at possibilities to address the concerns of Member States and hold another vote.  However, as the mandate of the European Parliament is coming to an end, failure to reach an agreement in the coming two weeks might result in non-adoption of the CSDDD during this legislative term and jeopardise the fate of the directive altogether.

[1] According to EU qualified majority rules, at least 15 of the 27 EU countries, representing 65% of the population, are required for the directive to pass.

KPMG's comments

The future of the CSDDD unfolds in two possible scenarios: either an agreement is reached, leading to the adoption of the directive with additional compromises – for example, by limiting the law’s applicability to very large companies only, as suggested by France – or the CSDDD faces the risk of non-adoption.

In case of failure of the law, companies will continue to operate in an uneven playing field. Legislation similar to CSDDD is already in effect in France, Germany, Norway, and Switzerland. Some of these laws extend to foreign companies with branches or business activities in these countries, which means that Swedish companies must navigate a complex patchwork of European regulations.

Moreover, while the Corporate Sustainability Reporting Directive (CSRD) requires companies to report on their environmental and human rights due diligence, it is silent on the scope and specifics of such due diligence. Adoption of CSDDD would lead to the development of Commission guidelines, as well as formation of case law, which in turn would provide companies with more legal foreseeability.  

Finally, while most critics highlight the potential for civil liability regarding extraterritorial harms as a major concern, the duty of care of parent companies for harms caused at the subsidiary level is gradually being established in the EU Member States. For instance, in 2021, the ruling by a Dutch Court of Appeal marked a significant milestone, affirming a parent company's duty of care to victims in a third state harmed by the activities of its subsidiary. The adoption of CSDDD would bring much-needed clarity on when and under what circumstances such duties arise, thereby reducing the risks associated with the current legal ambiguity. KPMG is closely monitoring the developments concerning the CSDDD and other ESG topics and potential liability and litigation risks in this respect. 

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