Europe

Council Warned Against Narrow EU Due Diligence Directive

Compromises may see value chains and finance sub-sectors excluded from human rights and environmental responsibilities.  

Ahead of a vote this week, the European Council has been urged to reject attempts from member states to weaken the Corporate Sustainability Due Diligence (CSDD) directive and ensure the standard covers companies’ entire value chains.

CSDD is meant to set an administratively and judicially enforceable standard of conduct to ensure companies are making their business operations more responsible globally,” Julia Otten, Policy Officer at law firm Frank Bold, told ESG Investor.

If the EU wants the directive to be cross-sectoral, then the value chain scope needs to be sufficiently wide and go beyond companies tackling human rights [and environmental] issues that are just around the corner. Companies need to be required to map their potential risks and actual impacts, so that they then have full visibility of the worst issues they need to address.”

The iteration of the directive published in February applies to EU and non-EU companies in the single market with more than 500 employees and revenues of at least €150 million. In higher risk industries, such as oil and gas and agriculture, the directive will apply to companies with more than 250 employees and €40 million in annual revenue. It will also apply with non-EU companies that surpass an overall annual turnover of €150 million or €40 million in the EU.

However, the exact scope of the requirements for qualifying companies has been much debated by the European Parliament and Council in the following months. Member states including France have pushed for a less ambitious version of the directive which would only require companies to identify, measure and mitigate human rights and environmental across their direct supply chains, thus not accounting for downstream parts of the value chain, such as customers.

“For big tech companies, their main challenges lie downstream in their value chains – where the technology is used, how they operate under authoritarian regimes, their privacy policies across jurisdictions. This is all part of downstream due diligence. In this case, it doesn’t make sense for the CSDD to be limited only to the production side,” said Otten.

The disruptions caused by the pandemic and the ongoing war in Ukraine have “really underlined the importance of promoting sustainability and resilience across global value chains”, she added, noting that businesses with strong internal governance and due diligence systems are “typically more resilient” in the face of such volatility. 

Cutting out investors 

One compromise text being reviewed by the Council has also excluded some financial groups from the directive, according to Otten.

“What we’ve seen in the latest compromises made by the Council is the exclusion of financial products from the scope. Member states also want to exclude alternative investment funds, but keep investment managers in scope. They want to leave it up to individual states as to whether or not to include pension funds,” she said.

However, banks and insurers are still expected to fall under the directive.

“That’s a too narrow and complicated approach with regard to the obligations of the financial sector,” Otten said.

The UN-convened Principles for Responsible Investment (PRI), Eurosif and Investor Alliance for Human Rights sent an open letter undersigned by 142 signatories to the European Commission that called for a broad scope of EU financial and non-financial companies to fall under the directive, noting that investors are already subject to environmental and social disclosure rules, such as the Sustainable Finance Disclosure Regulation (SFDR).

Responsible investors are committed to carrying out ongoing due diligence, throughout the value chain, and this should be reflected in the CSDD. This will create a level-playing field and enable investors to better manage the ESG risks and impacts of their investments,” the letter said.

On 25 November, member states nonetheless agreed on a general approach that has watered down requirements and limited the scope.

The Council will officially vote on its position on 1 December; the text will require a majority of 15 out of 27 ministers to vote in favour. Otten noted that “very intense debates” will continue in Parliament throughout December and January. Once MEPs have agreed a position, trilogue discussions will follow in spring, leading to completion of the process before the end of 2023. Member states will have two years to transpose it into existing national laws.

No single piece of legislation can be the silver bullet to solve the entire sustainability question. They all need to work together, so there needs to be alignment and coherence between the CSDD and other legislation, like the taxonomy and Corporate Sustainability Reporting Directive (CSRD),” Otten added.

On Monday, the EU Council gave its final approval to the CSRD, meaning that the directive is officially adopted and will apply to the first wave of companies from 2024.

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