Key vote puts EU closer to passing sustainability due diligence directive

European Parliament committee votes in favour of directive, which also sets out details on investor due diligence measures and director responsibilities on transition plans.

The European Parliament’s committee on legal affairs on Tuesday voted in favour of the EU’s proposed due diligence directive, with amendments setting out details on investor due diligence on investee companies making it through.

The Corporate Sustainability Due Diligence Directive (CSDDD), which will impose mandatory human rights and environmental due diligence requirements for companies and some financial institutions, got the green light in the legal committee with 19 votes for, three against and three abstentions.

This paves the way for a full plenary vote on the directive, expected on 1 June. After that, negotiations with the council of member states on the final legislative text can begin.

The CSDDD’s journey has been bumpy, and a key point of controversy has been the extent to which financial institutions will be covered in the directive. As previously reported, some MEPs had pushed for effectively exempting most investors from the due diligence requirements, and the council in December announced it had agreed the inclusion of financial institutions would be up to member states.

However, in the text passed on Tuesday, financial institutions are – to a large extent – included. “Appropriate measures” are outlined for institutional investors and asset managers, and the text says investors must do due diligence “to induce their investee companies to bring actual adverse impacts caused by them to an end”.

Where relevant, investors would be required to engage with investee companies in order to minimise the extent of adverse impact or bring it to an end, the text says.

For some market participants, however, today’s vote does not go far enough in pushing financial institutions to protect human rights and the environment. ShareAction’s EU policy officer Isabella Ritter described the rules as “light touch due diligence”.

Transition plan

The directive also, as previously proposed, requires companies to implement a transition plan compatible with limiting global warming to 1.5C.

A statement by the legal affairs committee on Tuesday clarified that directors of companies with more than 1,000 employees will be directly responsible for this step, “which in turn will affect the variable parts of their pay, such as bonuses”.

Richard Gardiner, head of EU policy at the World Benchmarking Alliance, told Responsible Investor that Tuesday’s vote is a “significant indication of how to finally implement and operationalise the Paris Agreement” and the role of the financial sector in doing this.

“There is an emerging consensus that the current level of voluntary pledges around net-zero targets and human rights commitments are not delivering the needed impact,” he added.

Ritter at ShareAction also described the proposals on directors’ duties, transition plans and executive remuneration as “crucial wins”.

The text passed on Tuesday also further aligned climate reporting requirements in the CSDDD with those of the Corporate Sustainability Reporting Directive.

Another key point of contention in the CSDDD is the proposed scope. The version approved on Tuesday would see EU-based companies with more than 250 employees and global turnover higher than €40 million, as well as parent companies with more than 500 employees and a global turnover of more than €150 million, covered by the due diligence requirements. Non-EU companies will also be covered if their turnover is higher than €150 million and at least €40 million was generated in the EU.

Overall, Deloitte estimates that the rules could cover 12,800 EU companies and 4,000 non-EU companies.

Key hurdle

While the legal affairs committee vote sees CSDDD clear a key hurdle, it is expected that a raft of new amendments will be proposed by MEPs ahead of the full European Parliament vote in June.

Axel Voss, an MEP and co-ordinator for the centre-right EPP group in the legal affairs committee, said on Monday the CSDDD is a “milestone for value chain responsibility”, and praised compromises achieved around the “risk-based” approach to due diligence.

However, he added that there were compromises in the text that “we are not happy with”, such as details on directors’ behaviour and corporate governance. “We will still try to vote against these measures as they have no place in this directive,” he said.

The CSDDD rapporteur Lara Wolters, an MEP in the Socialists and Democrats Group, welcomed the “broad consensus” achieved following the legal committee vote.

“There is a clear will to align this directive with international best practices, and to ensure companies must do due diligence in continuous dialogue with those affected by harm, and remedying it when it occurs,” she said.