Landmark deal: EU Council and EP reach provisional agreement on due diligence rules
The political agreement awaits formal adoption by both institutions; then it will need to be incorporated into the national legislation of EU member states.
The new rules are set to come into force in 2027; the CSDDD sets forth obligations for large companies, encompassing their operations, subsidiaries, and business partners, to address both current and potential adverse impacts on human rights and the environment.
One of the contentious issues was deciding what rules should apply to lenders, a subject that kept the negotiators at the table until the early hours of Thursday.
It was agreed that financial firms will be temporarily excluded from having to perform due diligence checks on clients securing loans or investments, with lenders only having to focus on their own operations for forced labor or environmental harm, for now. There will be a review clause for a potential future inclusion of this sector based on an impact assessment.
The deal also establishes that compliance with the CSDDD could qualify as a criterion for the award of public contracts and concessions, reinforcing the importance of corporate sustainability in public procurement decisions.
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Rachel Davis, co-founder and VP of Shift, commended the EU's leadership in corporate sustainability. She emphasized the alignment with the UN Guiding Principles on Business and Human Rights (UNGPs) and stressed the importance of ongoing guidance, policy measures, and enforcement to maintain alignment with international due diligence standards.
Erin Lyon, head of consulting (ESG) for LRQA, hailed the significant shift in responsibility for adverse impacts throughout supply chains, which she said makes sustainability practices imperative for companies. "Disclosure and evidence of corporate social responsibility throughout supply chains will now be enforceable, with penalties for non-compliance and a requirement to link remuneration of directors to climate efforts. This elevates sustainability practices in own operations and supply chains from a nice to have to a must have - the responsibility of legal teams and boards."
She noted also that advances in data collection and machine learning facilitate proactive monitoring of supply chains.
Commenting on the temporary exclusion of the financial sector from the rules, she highlighted that many investors are already actively looking at material issues within their investing, lending and insuring portfolio and practices, which includes environment and human rights issues. “With that in mind, we anticipate that investors will move towards compliance and this scope will be extended.”
Amnesty International's policy advisor, Hannah Storey, also weighed in on the new rules, saying they send a powerful message to large businesses in Europe to no longer ignore negative human rights impacts.
