Debate hots up over sustainability and due diligence directive

The European Parliament (EP) will vote in the first week of May on the increasingly controversial Corporate Sustainability and Due Diligence Directive (CSDD), and experts expect potentially significant changes from its committees.

Guillaume Croisant, managing associate in leading law firm Linklaters ESG team, told Commercial Risk Europe that “heated debates” are likely on a number of topics on which the various institutions appear to disagree.

Areas of contention include the thresholds that define companies subject to the due diligence duties, whether financial services should be subjected to the same measures, how the value chain should be defined, and whether an express obligation for directors to assess sustainability considerations in their duty of care should be included.

“The EP legal committee’s text will now need to be voted on by the Parliament as a whole in a plenary session early May (probably 2/3 May). Ahead of this plenary vote, MEPs from other EP committees can table amendments to the report so it is not yet clear whether there will be any significant changes in the plenary session,” explained the lawyer.

Once the parliament has finalised its negotiating position at the plenary vote, formal negotiations with the European Council can then commence. “It is likely that there will be further, significant changes to the CSDDD proposal between now and its final adoption,” predicted Croissant.

“There will likely be continued discussions on whether the directive will provide specific provisions on whether directors’ variable remuneration is linked to the achievement of the targets in the company’s transition plan for combating climate change, since the council suggested to drop this part of the commission’s proposal while the text of the EP legal committee maintains wording on this aspect,” he continued.

The lawyer explained that once the text is agreed upon and adopted, EU member states will then have to transpose the directive into national law within two years, or four years for in-scope companies involved in high-risk sectors.

The directive is also likely to provide a transition period before its application, potentially coupled with a phased-in approach depending on the size of company. The soonest the rules will come into effect is 2026-2027, said Croissant.

A number of EU companies are already subject to potentially far-reaching domestic due diligence laws. Two EU member states, France and Germany, have already introduced their general due diligence laws. This has increased the number of claims lodged against companies by activist NGOs under domestic regimes, pointed out the lawyer.

“A number of other member states are in the process of legislating or considering action. Many companies also include ESG targets as part of their director and senior managers bonus and long-term incentive plans. But these rules may make the position more prescriptive than currently applies in requiring specific links to targets in the transition plan,” added Croisant.

“Many large EU companies have also voluntarily implemented due diligence policies, based on soft law instruments such as the UN Guiding Principles on Business and Human Rights,” he said.