After much back and forth, the European Council has approved its negotiating position on proposed changes to the EU’s Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD). On February 26, the European Commission’s first Omnibus simplification package proposed changes to the CSRD and CSDDD that are intended to reduce the regulatory burden on subject companies as part of the EU’s drive to increase the bloc’s competitiveness.
In many areas, the Council is aligned or largely aligned with the Commission’s Omnibus proposal. However, there are some important differences. In this post, we discuss key negotiating points approved by the Council that will be of the most interest to US-based multinationals, and some of the differences from the Commission’s Omnibus proposal.
The Commission’s Omnibus proposal is discussed in detail in this earlier Ropes & Gray post.
The Council’s goal was to adopt its negotiating position before the end of the Polish presidency on June 30. The Council achieved this goal, with a week to spare.
Most of the Council’s changes relate to the CSDDD. This is because changes relating to the CSDDD involve level 1 legislation, which requires approval of the European Parliament and Council. In contrast, the changes that will be made to the operation of the CSRD are weighted towards level 2 delegated acts, specifically amendments to the existing European Sustainability Reporting Standards previously adopted by the Commission under the CSRD pursuant to delegated authority. Level 2 measures still involve input by the Parliament and Council, albeit more streamlined. See this Ropes & Gray post for a further discussion.
Corporate Sustainability Reporting Directive
Subject companies
- The Council proposes to increase the compliance threshold for EU undertakings and parent undertakings of large groups to 1,000 employees and a net turnover of €450 million (as some readers may recall, this was in the leaked draft that preceded the final Omnibus proposal). As also proposed by the Commission, the Council is advocating for increasing the EU net turnover threshold for non-EU parent entities to €450 million (for this cohort, the employee threshold would not apply). Except for the change to the turnover threshold for EU entities, the Council is aligned with the Commission’s Omnibus proposal.
Value chain information
- For purposes of their reporting under the CSRD, subject companies would not be able to require undertakings in their value chain with 1,000 or less employees to provide information exceeding the voluntary ESRS to be adopted by the Commission. This is consistent with the Commission proposal. The Council would add the requirement that subject companies notify these undertakings if requested information goes beyond the voluntary ESRS and of their right to decline to provide the information.
Corporate Sustainability Due Diligence Directive
Subject companies
- The Council proposal would significantly increase the compliance threshold, to 5,000 employees and €1.5 billion net turnover (the employee threshold would not apply to third-country companies and for these companies turnover would be limited to EU turnover). No changes are proposed for franchising or licensing business models. The Commission’s Omnibus proposal did not propose changes to the CSDDD compliance thresholds. Separately, recent media reports continue to indicate that the US government remains opposed to the CSDDD (in that regard, see this Ropes & Gray post).
Timing
- Compliance would be pushed back by an additional year, to July 26, 2029. This is a further one-year delay from that already in place as part of the stop-the-clock directive. With the later initial compliance date, EU member states would have an additional year beyond the Commission proposal to transpose the CSDDD – until July 26, 2028 – and the deadline for the Commission to publish compliance guidelines would be pushed back to July 26, 2027.
Due diligence
- The Council proposal streamlines the risk identification and assessment process relative to both the current CSDDD and Commission proposal, moving it from an entity-based to a risk-based approach. Instead of comprehensive risk mapping, companies would conduct a scoping exercise based on reasonably available information to identify the areas in their own business and at their direct business partners where adverse impacts are likely to occur. An in-depth assessment would be required in areas where adverse impacts were identified to be most likely to occur and most severe. Subject companies also would have to map their chains of activities to identify their indirect business partners, based on reasonably available information. A company only would be required to carry out an in-depth assessment of an indirect business partner if there is objective and verifiable information suggesting an adverse impact at that level (the Commission proposed a "plausible information" standard for indirect business partners).
- Subject companies only could request information from direct business partners for their scoping exercise if the information is necessary and, for direct business partners with under 1,000 employees, other reasonable means are not available. The Commission proposed a similar construct, although the Council proposal further limits the ability to seek information from direct business partners.
- Consistent with the Commission proposal, the Council narrows relevant stakeholders to employees, employees of subsidiaries and business partners, and their trade unions and workers’ representatives, and individuals or communities whose rights or interests are or could be directly affected by the products, services and operations of the company, its subsidiaries and its business partners and the legitimate representatives of those individuals or communities.
- Also consistent with the Commission proposal, there would be greater member state harmonization of due diligence, by further limiting the ability of member states to add additional due diligence requirements.
- Adequacy of due diligence generally would be required to be monitored every five years instead of annually. This also is consistent with the Commission’s proposal.
Climate transition plans
- The climate transition plan requirement would be further limited to the adoption of a transition plan for climate change mitigation that outlines among other things implementing actions that aim to ensure, through reasonable efforts, that the business model and strategy of the subject company contribute to (rather than the current formulation and Commission proposal of being compatible with) the transition to a sustainable economy and the limiting of global warming in line with the Paris Agreement. Consistent with the Commission proposal, there would not be a requirement to put the transition plan into effect. In addition, under the Council proposal, the current prescriptive design elements of the plan, such as time-bound targets, would become optional.
- As indicated above, the standard under the climate transition plan would move from “best efforts” to “reasonable efforts.”
- Under the Council proposal, the obligation to adopt the climate transition plan would be delayed until two years after the due diligence obligation begins (i.e., July 2031).
Liability
- Consistent with the Commission proposal, there would not be an EU-wide harmonized liability regime under the CSDDD. However, the Council proposal would include a 5% global turnover cap on fines, as compared to the not-less-than-5% maximum construct currently in the CSDDD and which was deleted in the Commission proposal.
All eyes are now on the parliament
The Parliament still needs to agree on its negotiating position, which is not expected to be finalized until October. The Parliament is still in the relatively early stages of developing its negotiating position and all signs are pointing to those negotiations being highly contentious. Once the Parliament finalizes its negotiating position, the Council presidency (then held by Denmark) and Parliament will enter into negotiations to come to a final text.
