February 2024
In December 2023, the European Parliament and European Council reached provisional agreement on the Corporate Sustainability Due Diligence Directive (CSDDD) that was proposed by the European Commission in February 2022. Although this represented significant progress, some political obstacles need to be overcome to finalise the package. Given the burdens the new directive would introduce, and concerns over whether it would meet its goals, some EU member states have indicated they may abstain from a vote in the Council. This could mean that the adoption of the Directive is delayed, or ultimately does not pass into law.
Assuming political agreement in the Council and Parliament can be found, the CSDDD will set obligations for companies to identify, assess, mitigate and remedy negative impacts on human rights and the environment across their chains of activity. These obligations will include formal analysis of the risks and associated controls relating to child labour, slavery, pollution, deforestation, excessive water consumption and damage to ecosystems. In-scope companies will need to integrate due diligence into their policies and risk management systems, across approaches, processes and codes of conduct. They will also need to develop and disclose climate transition plans that demonstrate how they will bring their activities in line with the Paris Agreement's 1.5 degree Celsius target. The plan should include time-bound targets for 2030, five-year targets up to 2050, and be updated every 12 months to assess progress toward achieving the targets.
The latest compromise text brought welcome clarity for financial services companies in the EU and UK on the potential extent of their obligations under the CSDDD, as well as minor adjustments to thresholds and definitions. Although the Directive must still pass final votes in the European Parliament and Council, and would not come into force until at least 2026, there are actions that companies can take now to prepare for the requirements.
- Reduced application for financial services
- EU and non-EU companies in scope
- Oversight and enforcement
- Preparing for implementation
- Next steps
The full application of CSDDD would require analysis and contractual assurances for upstream1 and downstream2 partners in companies' chains of activity, introducing potential challenges around how to conduct due diligence for operations over which they have no direct control.
The compromise text provisionally agreed between the Council and Parliament confirms that CSDDD requirements will not apply in full to regulated financial undertakings, with 'only the upstream but not the downstream part of their chain of activities' covered by the Directive.
This offers a reprieve for financial services firms, although it may only be temporary. Downstream activities for financial services firms may be captured by the CSDDD in future — within two years of the Directive coming into force, and following an impact assessment, the European Commission will 'lay down additional sustainability due diligence requirements tailored to regulated financial undertakings with respect to the provision of financial services and investment activities'.
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