On 23 February 2022 the European Commission has submitted a proposal for a directive on corporate sustainability due diligence (“DD Directive”) with the aim to enhance the protection of the environment and human rights in the EU and globally. The Council adopted its general approach on 1 December 2022.

The Council and the European Parliament have now reached on 14 December 2023 a provisional agreement (the “Agreement”) on the DD Directive which provides a framework on the scope of the directive, clarifies the liabilities for non-compliant companies, improves the definition of the different penalties, and completes the list of rights and prohibitions of the in-scope companies. The Agreement needs now to be endorsed and formally adopted by both institutions.

In scope entities

Would fall under the scope of the DD Directive:

• EU large companies with more than 500 employees and a net worldwide turnover of €150 million.
• Non-EU companies if they have a €300 million net turnover generated in the EU, three years from the entry into force of the directive. (A list of such non-EU entities falling under the scope of the DD Directive shall be published by the Commission).

The financial sector entities will be temporarily excluded from the scope, but they could be included at a later stage after an impact assessment.

New obligations for in-scope companies

Large companies will have to comply with new obligations regarding actual and potential adverse impacts on the environment and human rights for their business chain of activities including the upstream business partners of the company as well as partially the downstream activities, such as distribution or recycling. Compliance with the DD Directive will be a condition for the award of public contracts and concessions.

They should also ensure that their business model and strategy are compatible with the Paris Agreement on climate change.

Sanctions for infringements to the obligations

Penalties and civil liability have also been foreseen for infringing those obligations.

Several injunction measures will be applicable for companies which fail to pay fines imposed on them for the violation of their obligations. Pecuniary penalties take into consideration the turnover of the company (i.e. a minimum maximum of 5% of the company’s net turnover).

The Agreement strengthens the provisions related to the obligation of means for large companies to adopt and put into effect a transition plan for climate change mitigation.

It also reinforces the access to justice of persons concerned by adverse impacts and sets the period during which they may bring claims to five years.

It is important to note that companies that identify adverse impacts on environment or human rights by some of their business partners will be required to end those business relationships when these impacts cannot be prevented or ended.