A sweep of ESG-related measures are in the legislative pipeline for companies. As a ground-breaking proposal for a Corporate Sustainability Due Diligence Directive enters a crucial negotiation stage at EU level, Matheson analyses the latest developments.
ESG themes remain firmly in the spotlight with the progress of far-reaching corporate sustainability proposals1 through the EU legislative process. While the EU's primary policy focus in this area has been on corporate reporting, the proposed new measures look beyond what companies say about their ESG performance and at what they actually do. The emergence of cracks between the various views of the EU co-legislators suggests that the path to getting the measures onto the statute books may not be as straightforward as initially appeared.
The Corporate Sustainability Due Diligence Directive (CS3D) would see a substantive duty on large companies to identify and address adverse human rights and environmental impacts of their operations, subsidiaries and "value chains". Certain classes of in-scope companies would have to draw up plans to meet the objectives of the Paris Climate Agreement. As currently framed, the requirements could also impact entities with which an in-scope company has a corporate relationship.
Legislative Path
The February 2022 European Commission (Commission) proposal for CS3D follows on from the Corporate Sustainability Reporting Directive (CSRD). The latter came into force on 5 January 2023 and transposition measures are currently being formulated across Member States in advance of the deadline of 6 July 2024. Reporting standards are being developed at EU level. CS3D and CSRD are closely linked. They, along with other significant legislation in this space, stem from the ambitious legislative targets set by the Commission to underpin the European Green Deal2 committing the EU to climate neutrality by 2050.
CS3D is to be adopted through the ordinary legislative procedure, meaning that the European Parliament and Council, as co-legislators, will have to adopt the same final text.
In December 2022, following extensive negotiation, the Council agreed its General Approach3 for negotiations with the Parliament. The General Approach recommends some significant changes to the Commission's proposal (the chief ones being outlined below). The Council must now wait for the Parliament to reach its own agreed position (expected in June 2023) before the two institutions begin negotiations.
Early signals from the Parliament are that core aspects of the Council's compromise text will be rejected. Currently, it seems that there are significant policy gaps to be bridged between the parties.
In-scope Entities
In determining which companies will fall under CS3D, for EU companies, the criteria are based on the number of employees and the net worldwide turnover. For non-EU entities, you look at net turnover generated in the EU. Under the Commission proposal, these are the qualifying thresholds:
The Council advocates a delayed and phased-in approach with CS3D applying first to "very large companies" (with more than 1000 employees and €300 million net worldwide turnover or, for non-EU companies, €300 million net turnover generated in the EU), three years from the entry into force of CS3D. Indications are that Parliament, in contrast, may seek lower thresholds and reduced timelines, bringing more companies in scope, sooner.
The Commission's proposal envisages financial services as being within the scope of the Directive. In a major policy divergence, the Council recommends that each Member State decides whether to include financial services within the definition of "chain of activities" when transposing the CS3D. This approach has come under fire for undermining a core function of EU Directives in creating a harmonised approach across Member States (including by Irish delegates).
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Footnotes
2. https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en
3. https://data.consilium.europa.eu/doc/document/ST-15024-2022-REV-1/en/pdf
Originally Published by the Public Sector Magazine
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