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On October 8, the European Parliament reached political agreement on its negotiating position concerning the Omnibus simplification of the Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD). In this post, we discuss aspects of where the Parliament landed.
Leading up to the political agreement, it was an open question whether the center-right European People's Party (EPP) was going to partner with the far right or the parties to its left to get the votes it needed to adopt a proposal. The centrist compromise package ultimately prevailed, with the left accepting the more centrist of the two EPP proposals as the less bad option, following what was viewed as a credible threat by the EPP to side with the far right.
Based on what we have heard from our various sources, the package includes the details below. There will be more in the final text and of course the devil is in the details, so we will have to see how this matches up with the negotiating position ultimately approved by the Parliament, as well as other similarities to and differences from the European Commission and European Council proposals. More to come.
The Commission's February Omnibus proposal is discussed in detail in this Ropes & Gray post. The negotiating position adopted by the Council in June is discussed in this post.
Corporate Sustainability Reporting Directive
Subject Entities
EU entities would be in scope if they have 1,000 employees and €450 million turnover. According to some sources, this would reduce the number of in-scope companies by approximately 90%.
These thresholds are consistent with the Council's proposal. In contrast, the Commission had proposed a 1,000 employee threshold and either turnover of €50 million or a balance sheet of €25 million (as some readers may recall, the Council threshold was contemplated in the leaked Commission draft from earlier in February). At a minimum, there appears to be alignment that 1,000 employees is the right number.
The Commission and Council also have proposed increasing the EU net turnover threshold for non-EU parent entities to €450 million (for this cohort, the employee threshold would not apply). The Parliament is presumably aligned here.
Corporate Sustainability Due Diligence Directive
Subject Entities
EU companies would be in scope if they have 5,000 or more employees and €1.5 billion of turnover. This is consistent with the Council's June proposal. According to some sources, this would reduce the number of in-scope companies by approximately 70%.
The Council also proposed a €1.5 billion EU turnover threshold for third-country companies (for these companies, the employee threshold would not apply). The Council did not propose changes for franchising or licensing business models. The Parliament is presumably aligned with these aspects of the Council proposal.
In contrast, the Commission's Omnibus proposal did not propose changes to the CSDDD compliance thresholds.
Due Diligence
Under the Parliament proposal, due diligence would be entirely risk-based.
The Parliament proposal builds on the Council proposal, which also would streamline the risk identification and assessment process relative to both the current CSDDD and Commission proposal. See this Ropes & Gray post for a more detailed discussion of the Council's proposal.
Scoping
Companies would be required to carry out a scoping, based on reasonably available information, to identify general areas across their own operations and their subsidiaries and, where related to their chains of activities, those of their business partners where adverse impacts are most likely to occur and be the most severe.
Information would be reasonably available if it can be obtained by the company internally or from existing or secondary sources without contacting a business partner. This might for example include information from searches or obtained through earlier cooperation.
Entity-level information and communication with business partners would not be relevant at this stage. EU Member States would be required to ensure that, for purposes of the scoping analysis, companies do not seek to obtain the information from their business partners but instead rely solely on information that is already reasonably available, including risk factors.
Further Assessment
Based on the results of the scoping and where, based on relevant and verifiable information, the company has grounds to believe that adverse impacts have arisen or may arise, it would be required to carry out a further assessment in the areas where adverse impacts were identified to be most likely to occur and be the most severe. Companies would not be required to request information from business partners where no likely and severe risks were identified. Companies would be able to prioritize assessing direct business partners, in line with severity and likelihood of the adverse impacts.
EU Member States would be required to ensure that, for purposes of the further assessment, companies do not seek to obtain information from business partners unless necessary. If the business partner has fewer than 5,000 employees, companies would be able to seek the information from the business partner only as a last resort if it could not reasonably be obtained by other means, in particular from existing or secondary sources. In any case, the request would be required to be targeted, reasonable and proportionate.
If information necessary for the further assessment could be obtained from different business partners, the company would be required to seek the information, where reasonable, directly from the business partner or partners where the adverse impacts are most likely to occur. Information could be sought individually or collaboratively.
Information Gaps
If, despite having taken appropriate measures to identify adverse impacts, a company does not have all the necessary information regarding its chains of activities, it would be able to reasonably explain why the information cannot be obtained. If, as a result, the company could not take appropriate measures to prevent, mitigate, bring to an end or minimize the adverse impact, it would not be penalized.
Transition Plans
Under the Parliament proposal, companies would still be required to adopt a climate transition plan in line with the Paris Agreement (the far right compromise would have eliminated this requirement). Consistent with both the Commission and Council proposals, there would not be a requirement to put the transition plan into effect. Companies would have to use reasonable efforts to implement the plan, which is consistent with the Council proposal that would move the standard from "best efforts."
Civil Liability
Consistent with the Commission and Council proposals, there would not be an EU-wide harmonized approach to liability. Each Member State would determine its own approach.
Under the Parliament's proposal, the liability provisions would be subject to review in 2030.
Next Steps
The proposal will be voted on by the Parliament's JURI committee (Committee on Legal Affairs) on Monday. From there, it heads to a plenary vote of the Parliament, which is expected to occur later this month or in early November.
Then trilogue discussions will commence, to come to a final agreement. Although widely viewed as ambitious, the Danish Presidency of the Council is seeking to reach a deal in 2025, before the end of its term.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
