European Corporate Due Diligence has not (yet) been buried
Hit but not sunk. On February 28th, COREPER, the committee of permanent EU Council representatives, rejected the draft directive on European Corporate Due Diligence as it failed to secure the necessary qualified majority. Several countries, and notably Germany and Italy, blocked the adoption of the text – known as the Corporate Sustainability Due Diligence Directive (CSDDD). Despite this major setback, all is not lost, and negotiations are still in progress.
Clearly, the European Commission’s draft corporate sustainability due diligence directive is not to everyone’s taste. The directive aims to introduce human rights and environmental corporate due diligence requirements, covering the full value chain. Companies would be required to ensure that human rights and environmental standard violations do not occur in their operations or in those of their subsidiaries and suppliers. They will be required to take action to seamlessly identify, prevent, and correct any violations. Companies will also be responsible for implementing reparation mechanisms for the victims.
The text draws inspiration from non-binding standards that already exist at international level, including the United Nations’ Guiding Principles on Business and Human Rights. It also relies on regulation currently enforced in several members countries, and notably in France, the Netherlands and Germany. The objective is to harmonise the rules for European companies and to take the process one step further by broadening the scope compared to existing national laws. For example, in France, only companies employing over 5,000 people are required to comply with the due diligence law of March 27th, 2017.
The CSDDD draft directive would lower the number of employees (to 500+, a figure that France attempted to raise to 5,000 at the last minute), set a specific revenue threshold (above €150 million) and impose stricter requirements for sectors with high environmental and social impacts, such as textile.
The directive would concern all companies, whether they have their headquarters in the European Union or in other countries, if they are active in the region. According to the Commission’s estimates, corporate due diligence would therefore apply to around 18,000 companies. The proposed directive also includes the creation or designation of national administrative authorities whose mission would be to supervise the correct execution of due diligence duties, with the power to impose administrative sanctions.
Business lobbies have won the first battle
Since the provisional tripartite agreement (European Commission, EU Council and European Parliament) reached in December, the draft directive has been under attack from business lobby groups, led notably by the main employers’ organisations. Determined to kill the project, they ultimately succeeded in suspending the process - temporarily, on 28th February - triggering angry reactions from NGOs. The latter are denouncing an alarming and unacceptable reconsideration of a text aimed at protecting the population from human and environmental rights abuses.
As investors committed to supporting the development of a more sustainable and inclusive economy, we deeply regret the rejection of the draft directive. We truly believe in the pertinence of the directive, for three main reasons. First, implementing due diligence requirements would enable all stakeholders - and investors in particular - to gain a better understanding of the risks faced by these companies. Furthermore, we believe that the
transparency efforts resulting from applying the directive would advance progress in these areas. Finally, events in recent years have demonstrated the dependence of our economies to value chains that tend to be overly complex: understanding and controlling ESG risks across supply chains is a key challenge, both for a company’s reputation and its financial performance.
Human rights are a key area of concern and a major topic for engagement with the companies in our investment universe. In this respect, Sycomore Asset Management drew up a formal human rights policy in 2020, referring explicitly to the UN’s Guiding Principles.
As far as the future of the CSDDD directive is concerned, it is still too early to give up hope. However, time is of the essence before the European elections in June, which could reshuffle the cards. The importance given to the environmental and social transition in the Old Continent from the second half of 2024 will very much depend on the stance of the new Parliament. Advocates of the CSDDD are therefore keen to speed up the process, in the hope that the directive can be endorsed forcefully and without delay. The next few weeks will clearly be decisive.