CS3D: Financial Sector Temporary Exclusion

The Council of the European Union announced a noteworthy advancement in corporate sustainability due diligence on December 14, 2023. They confirmed in a news release that they and the European Parliament had come to an agreement on the Corporate Sustainability Due Diligence Directive. The press release made a point of highlighting the directive's temporary exclusion of the banking sector. But the notification also made clear that the directive has a review clause, implying that the financial industry may be included to it in the future after a comprehensive impact analysis.

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Corporate Sustainability Due Diligence Directive (CS3D)

The AFME proposes amendments to the Sustainability Due Diligence Directive, supporting its objectives for financial institutions. They advocate a risk-based approach, addressing concerns on scope, due diligence, and civil liability.

GrandAlessandro Micagni

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Council and Parliament strike deal to protect environment and human rights

On 14 December 2023, the Council of the EU issued a press release stating that it had reached a provisional deal with the European Parliament on the

Global Regulation TomorrowSimon Lovegrove (UK), Haney Saadah

EU Agreement Advances Corporate Sustainability

Today's interim agreement on the corporate sustainability due diligence directive (CSDDD) is a major accomplishment for the European Parliament and the Council of the European Union. This directive represents a significant advancement in the EU and worldwide efforts to strengthen environmental protection and protect human rights. Big businesses will have to follow strict guidelines under the CSDDD to detect and mitigate any negative effects on human rights and the environment, both now and in the future. These responsibilities will extend to the company's subsidiaries and business partners in addition to its own activities. This all-encompassing strategy highlights the EU's dedication to encouraging corporate responsibility and sustainable practices that put the welfare of people and the environment first.

Corporate Responsibilities: Obligations and Penalties Under Due Diligence Directive

A framework of obligations for large firms is introduced by the due diligence directive, with the goal of recognizing and mitigating current and potential negative effects on the environment and human rights throughout their corporate operations. This covers not just the company's own operations but also those of its upstream suppliers and some of its downstream activities, such as recycling or distribution. The directive also stresses the necessity for adherence to sustainable practices in line with international agreements like the Paris Agreement on climate change by outlining penalties and civil liability for businesses that fail to satisfy these requirements. Let's examine the primary responsibilities mentioned in the text:

• Scope of Responsibility: The extent of a large company's responsibility is to evaluate and manage any real or prospective negative effects on the environment and human rights along their whole supply chain, including upstream suppliers and specific downstream operations like recycling or distribution.

• Penalties and Civil Liability: Should a company be found to be in violation of its commitments, the directive specifies penalties and civil liability. This acts as a disincentive and emphasizes how crucial it is to abide by human rights and environmental laws.

• Alignment with International accords: Businesses must create and carry out plans to make sure that their business models and strategies comply with international accords, such the climate change accord in Paris. This emphasizes how important it is for businesses to take action to stop climate change and advance sustainability.

• Integration of Sustainable Practices: In order to promote a culture of accountability and responsibility for the effects on the environment and society, the directive supports the integration of sustainable practices into business plans.

• Continuous Monitoring and Adaptation: Businesses that want to maintain a commitment to continuous improvement in their environmental and human rights practices must undertake continuing monitoring and adaptation to ensure compliance with their obligations.

Directive Scope, Liabilities, Penalties, and Company Obligations

The two co-legislators reached a provisional agreement that includes several important components that are necessary for the corporate sustainability due diligence requirement. First, it clarifies the range of activities and entities covered by the regulation by outlining its scope. Second, it creates definite penalties for businesses that disregard the directive's requirements, guaranteeing responsibility and respect for human rights and environmental norms. Thirdly, in an effort to discourage wrongdoing and encourage ethical business practices, the agreement specifies a number of fines that will be imposed on noncompliant organizations. Finally, it completes the list of rights and restrictions that businesses must follow, establishing precise standards for business behavior with regard to environmental and human rights issues. These components work together to provide the directive's cornerstone, which supports a framework for corporate accountability and sustainability.

Scope of the Corporate Sustainability Due Diligence Directive

The agreement outlines the directive's parameters, stating that it is applicable to major enterprises that satisfy particular requirements. The directive's restrictions apply to companies with more than 500 employees and a net worldwide turnover of more than €150 million. Furthermore, the regulation is applicable to non-EU businesses three years after it enters into force if they have a net turnover of more than €150 million within the EU. The Commission is entrusted with releasing a list of non-EU businesses that fall under the purview of the regulation in order to guarantee clarity and enforcement. By clearly defining the entities required to adhere to the directive's requirements, this segmentation makes it easier to implement and oversee the process.

Financial Sector Exclusion: Temporary Measure with Future Review Clause

The latest agreement grants a temporary exemption from the corporate sustainability due diligence regulation to the financial services industry. On the other hand, subject to a thorough impact assessment, a review clause has been included to evaluate the possible future inclusion of the financial downstream industry:

• Temporary Exclusion: The agreement states that the requirements set forth in the corporate sustainability due diligence regulation will not apply immediately to financial services. This exemption buys more time for analysis and thought to the unique characteristics of the industry.

• Future Review provision: One of the agreement's most important features is the review provision, which enables a detailed analysis of the effects of incorporating the financial downstream sector into the directive. This evaluation procedure guarantees that decisions about the sector's inclusion are well-informed and supported by analysis and empirical data.

• Conditional Inclusion: Depending on the results of the impact study, the financial downstream sector may or may not be included in future decisions. The directive is still adaptable and can be changed in light of the assessment's conclusions, guaranteeing the usefulness and applicability of its provisions.

• Improving Sustainability: Although the financial industry was temporarily left out, its possible inclusion in the future highlights the directive's main objective, which is to encourage corporate responsibility and sustainability across a range of businesses. This indicator shows that the financial services industry is committed to raising social and environmental standards on a constant basis.

Climate Change Measures and Civil Liability in Corporate Sustainability Directive

The current agreement emphasizes the necessity of transition plans carried out with the best efforts possible and reinforces large firms' duties to undertake effective mitigation methods for climate change. In terms of civil liability, the agreement improves impacted parties' access to justice by instituting a five-year statute of limitations on claims pertaining to adverse affects and imposing restrictions on the disclosure of evidence, the use of injunctions, and the expenses incurred by claimants. In addition, businesses need to cut their connections with business associates who unavoidably have a negative influence on the environment or human rights. Injunctions and fines depending on the company's turnover are among the penalties for non-compliance, and as part of the due diligence process, communication with impacted stakeholders is required.

Linking Corporate Sustainability to Public Procurement: Implications of the Agreement

The deal demonstrates how closely corporate sustainability and public procurement procedures are related. It states that compliance with the Corporate Sustainability Due Diligence Directive (CSDDD) may be used as a prerequisite for public contract and concession distribution. This clause highlights the increasing focus on incorporating social and environmental responsibility into public procurement procedures, which encourages businesses to give sustainable practices top priority. The agreement intends to promote accountability and transparency in business activity while driving beneficial environmental and social consequences across supply chains by aligning procurement criteria with sustainability objectives.

Defining Corporate Obligations: Key Terms in the Corporate Sustainability Directive

The interim agreement provides concepts and terminology that are critical to comprehending the duties placed on businesses, as outlined in Annex I of the Corporate Sustainability Due Diligence Directive. In accordance with approved international instruments, this section defines detrimental impacts on human rights and environmental degradation and clarifies specific rights and prohibitions:

• Annex I Obligations: The obligations listed in Annex I are extensive and provide a baseline for determining the negative effects on human rights that occur when businesses violate these rights. These commitments guarantee unambiguous and binding norms for business behavior by citing approved international agreements that are supported by every member state.

• Extension of Human Rights Components: The accord adds new components to Annex I commitments, with a special emphasis on safeguarding vulnerable groups' human rights. Furthermore, upon ratification by every member state, the Core Conventions of the International Labour Organization (ILO) may be added to the list by delegated acts, therefore reinforcing human rights norms.

• UN Conventions: A number of UN conventions, including the Convention on the Rights of the Child, the International Covenant on Civil and Political Rights, and the International Covenant on Economic, Social, and Cultural Rights, are included in the provisional agreement's Annex I references. As a result, the directive's consideration of human rights is expanded.

• Nature of Environmental Impacts: By characterizing them as quantifiable degradations like detrimental soil changes, air or water pollution, emissions, excessive water use, or other effects on natural resources, the agreement explains the extent to which environmental impacts are covered by the directive. This distinction gives businesses clarity when evaluating and reducing environmental risks related to their activities.