Policy and Regulation

Explainer: What the EU parliament’s CSDDD vote means for business and finance

China electronics factory
The CSDDD will impose sanctions on companies that fail to implement the new rules (Photo: Feng Li/Getty Images)

Here is what you need to know about the inclusion of mandatory climate transition plans in the EU's Corporate Sustainability Due Diligence Directive, and how the requirement will affect companies and their directors.

Large companies and financial institutions operating in Europe should adopt and implement climate transition plans in line with the 2015 Paris Agreement, according to a European parliament vote on June 1 on the planned EU Corporate Sustainability Due Diligence Directive. Negotiations will now begin between the parliament, the European Commission and EU member states to agree a final position.

What’s in the proposed CSDDD?

Companies operating in the EU with more than 250 employees will, in the coming years — if the June 1 vote becomes law — have to screen their value chains for human rights abuses and environmental harm. This demand will apply to companies and financial institutions, their operations and those of their subsidiaries and supply chains, even if they are headquartered outside the EU. 

The financial institutions covered by the directive include banks, insurers and investors, while pension funds, private equity funds, market operators and credit rating agencies are excluded.

Companies and financial institutions with more than 250 employees will also have to adopt and implement climate transition plans in line with the Paris Agreement. These plans will have to explain how companies will reduce Scope 1, 2 and 3 carbon emissions by developing and meeting science-based targets.

Implementing the rules

Companies with more than 1,000 employees would have to meet the CSDDD’s obligations three years after the directive comes into force (most likely in 2024), for those with more than 500 employees it would be four years after entry, and those with more than 250 employees it could take five years.

If companies fail to implement the rules, the CSDDD will impose sanctions on non-compliant companies and civil liability on businesses for violations of certain due diligence obligations.

Large companies will have to link directors’ variable remuneration to the adoption of a climate transition plan.

In the previous draft of the text, however, directors were required to have oversight of the due diligence around human rights and the environment. In the text agreed on June 1, directors are simply awarded a “duty of care”.

The failure to make directors responsible for a “coherent, company-wide implementation of due diligence [...] sends the wrong signal to [the] board”, and “makes it easier for companies wanting to escape oversight”, Julia Otten, policy officer at law firm Frank Bold, tells Sustainable Views. 

Directors left off the hook?

After originally backing the CSDDD, members of the parliament’s centre-right European People’s party (EPP) made a last minute attempt on May 31 to convince colleagues to vote against the legislation, in yet another attempt to roll back regulation that would offer greater environmental protection. The dropping of Article 26 on director oversight of due diligence was in response to this opposition.

Dutch MEP Lara Wolters, who led the CSDDD negotiations, said during a briefing in Brussels that she “minded” the article being voted down, but suggested it could have been much worse given the 50 mainly “very destructive” amendments that were suddenly tabled against the directive. 

She described the vote, and the lead up to it last week, as an “emotional rollercoaster, with a lot of uncertainty about what some of my colleagues in this parliament were going to do”. 

The Greens, Liberals and Socialists voted to back the law, with many MEPs taking to social media to herald the result as a success. “Today's vote on the CSDDD is a huge step forward towards legislation that prevents companies from abusing the planet and people,” tweeted the Socialists and Democrats group in the European parliament.

“I am very happy we stuck together and got this over the line,” said Wolters, thanking the “sensible centre of this parliament”. 

Last month, the EPP group led the parliament’s agriculture and fisheries committees to vote against the European Commission’s planned Nature Restoration Law. The group is carrying out a full-blown campaign against the law online ahead of the next vote on it in the environment committee later this month.

What do experts think?

The CSDDD is “a serious law, not a nice-to-have for companies, but serious business,” said Wolters. She insisted that it was important for companies, people and workers in and outside the EU, and showed that the EU was “willing to put its money where its mouth is”.

The agreed text was “a clear improvement on the commission and [European] Council texts in terms of alignment to the international standards”, says Otten, despite its failure to endorse directors’ oversight on the implementation of due diligence.

"The recognition by the European parliament that the financial sector has a critical role to play in protecting human rights and the future of our planet is a real game-changer,” said Isabella Ritter, from UK non-governmental organisation ShareAction, in a statement.

She too, however, expressed her disappointment regarding the rules on director obligations. “Directors’ oversight is an important part of responsible business conduct according to international guidelines and enables companies to be more resilient and efficient,” she said.

Arianne Griffith, corporate accountability lead at NGO Global Witness, described the vote as “a critical step in the right direction”. Any watering down of the directive during further negotiations later this year “could put human rights, the environment and our shared climate at risk”, said Griffith in a statement. 


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