European Council adopts watered down CSDDD

Political horse-trading leaves Germany isolated

The Belgian presidency of the European Council has finally managed to gain approval for the Corporate Sustainability Due Diligence Directive (CSDDD), despite continued German opposition, by significantly watering down the proposed rules.

Italy, France and other states were reportedly persuaded to back the revised plan because the revenue threshold for firms that need to comply with the regulation rose to €450m and a controversial element that would enable trades unions and others to sue firms for non-compliance was dropped.

This meant that Germany was the sole EU state to abstain from the vote. The directive will now proceed to the European Parliament for final approval.

It is not clear whether the Parliament will, however, approve the heavily watered down version. Though a comment from parliament negotiator Lara Wolters suggests it may win support. The Council endorsement is a “victory in the fight to hold companies responsible for people and the environment,” she said, according to news agency Euronews.

Julia Grothaus, litigation, arbitration and investigations partner at law firm Linklaters, said that the CSDD has passed a “crucial hurdle”.

“While Germany abstained from voting in today’s meeting of the relevant Council committee and many feared this could thwart the endorsement of the directive, the majority of EU member states voted in favour of the CSDDD,” she continued.

“The Belgian Council Presidency was ultimately able to win the required majority for its final compromise proposal by making far-reaching concessions. The amendments inter alia relate to the size and turnover thresholds for application of the CSDDD, the definition of the chain of activities covered by the due diligence obligations, coverage of the financial sector, civil liability and transition periods,” added Grothaus.

The lawyer said that in view of the new, far-reaching obligations and risks under the CSDDD, companies are well-advised to plan ahead.

“The CSDDD requires companies to identify potential and real adverse environmental and human rights impacts arising from their own operations, subsidiaries and business relationships, carry out due diligence and mitigate actual and potential adverse impacts on human rights and the environment. Companies must take measures to prevent or mitigate any potential impacts they identify, as well as end or minimise any real impacts. They will also be obliged to adopt and put into effect a transition plan for climate change mitigation in line with the Paris Agreement. In case of infringements, companies may be held liable and face financial penalties,” added Grothaus.

After Germany’s steadfast refusal to accept the original proposal it was reportedly France and Italy that suggested last-minute changes that enabled the directive to progress.

“The most significant concession made concerns the scope of companies covered by the directive. By raising the employee threshold from 500 to 1000 and the turnover threshold from €150m to €450m, only a third of companies are now covered by the law as opposed to what was initially proposed,” said Grothaus

Anaïs Berthier, head of ClientEarth’s Brussels office, said the progression of the CSDDD had come at a “high price”.

“After years of intense negotiations and despite multiple attempts to gut the law, member states have finally backed the CSDDD. But this vote has come at a high price – last minute horse-trading means the law will now only cover a small number of companies, falling short of its initial aim to tackle the full breadth of companies’ environmental footprint,” she said.

“The CSDDD has the potential to set a global precedent by transforming voluntary international business and rights standards into binding rules that foster fair competition and level the playing field for large companies across the EU. But corporate lobbying and political games have butchered this opportunity to revolutionise how we do business in the EU and beyond by excluding most companies from its scope,” continued Berthier.

The NGO chief said the Council’s move to block the directive goes against the usual democratic EU process, and reflects rising political opposition to the whole human rights and environmental agenda ahead of various key European national elections.

“This rollback by the Council at the eleventh hour is extremely concerning as it flies in the face of the EU’s history of policymaking and goes against the democratic decision-making process of EU laws. This disrespect for the rule of law is a unsettling trend that we are witnessing across several environmental laws still being approved. It’s a worrying sign of things to come in the run up to the EU elections,” said Berthier.

“We must now make the most out of what we’ve got and focus on implementing and building on what has been agreed. To do that, the European Parliament must swiftly vote to support the law that they had backed in December, so that the CSDDD can be approved and we can start turning words into action. There’s no time to waste,” she concluded.

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