New Corporate Sustainability Due Diligence Directive: A Ticking Bomb?
On 24 May 2024, the Council approved the political agreement on the Corporate Sustainability Due Diligence Directive, which means that the text is final (and will be published shortly).
It is surprising that this Directive has not attracted much media attention so far. In our view, it deserves one: it may give a powerful tool to the national enforcement authorities (and indirectly to the citizens) to enforce the green deal goals directly against the companies, on an ad-hoc basis and based on rather blurred criteria. The Directive could also make civil claims (and thus also class actions) much easier. That is why further advocacy seems necessary. Let’s look at it more closely.
The Directive obliges large EU and non-EU companies to identify and disclose any potential negative impacts on the environment and human rights worldwide, and to remediate it. This includes impact caused by immediate business partners.
Importantly, the Directive provides that Member States ‘shall ensure’ that the obligations set out in the Directive have been complied with. Based on the Directive, the national authorities can impose measures such as obliging companies to:
- make necessary financial or non-financial investments
- if necessary and as a last resort, end business relations with business partners
- carry out mandatory consultation with stakeholders
The Commission is going to issue a set of guidance documents for specific sectors or specific adverse impacts that will help the companies and enforcement authorities to assume their roles. However, these documents will be non-binding. So, the national authorities will likely keep an important level of discretion. Admittedly, the Directive provides that the Member States’ actions must be proportionate, but the proportionality requirement is obvious and it is not really a game-changer.
The Annex to the Directive includes EU legislation and international agreements that are subject to the due diligence (and thus also to the remediation requirement). These instruments are also quite broad. Admittedly, in the environment protection part of the Annex, the list of instruments is not long: the most important are biodiversity, POPs, PIC, Ozone Layer, Transboundary Movements of Hazardous Wastes (Basel) and protection of marine equipment. However, the human rights part of the Annex prohibits, among others, any measurable environmental degradation (with enumerated impact on human life), including soil change, water or air pollution, harmful emissions, excessive water consumption, degradation of land, or deforestation. This is rather broad. This part also includes the right to enjoy just and favourable conditions of work, including a fair wage and an adequate living wage for employed workers. This may also be a tricky point.
Finally, the Directive sets out an obligation for large companies to adopt and put into effect, through best efforts, a transition plan for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement.
All this must be read together with the provision in the Directive related to the civil liability: Member States must ensure that victims get compensation for damages resulting from an intentional or negligent failure to carry out due diligence. The Directive also introduces a complaints procedure and overall increases public reporting (there is a direct link to the sustainability reporting standards adopted under the recent Corporate Sustainability Reporting Directive 2022/2464). All this could make any civil actions easier and more impactful, including class actions (see also recent EU Class Actions Directive 2020/1828 that makes class actions easier in general).
For example, in the last decade, we have seen an increasing number of civil litigation against states and companies related to the climate change mitigation. The Directive may give a new impetus to these actions.
To conclude, there may be some concerns related to the future implementation and enforcement of the Directive. In order to mitigate these concerns, industry should advocate with the European Commission adoption of guidance documents that will set clear and proportionate compliance measures (based on the best effort principle), and that would set clear boundaries to national enforcement.