No link variable remuneration and sustainability target

Scope (article 2)

• The general size thresholds from the proposal are retained, but the period for which a company needs to fall into the scope of the CSDD has been clarified. A company must exceed the thresholds (number of employees and net turnover) for two consecutive financial years.
• Furthermore, a phase-in period has been introduced. The CSDD will first apply to companies with over a thousand employees and a worldwide net turnover of three hundred  million euros, or three hundred million euros net turnover generated in the EU for non-EU companies, before applying to the other companies that meet the criteria of the CSDD. After the phase-in period, the CSDD will apply to:
  • EU companies with over five hundred employees and a worldwide net turnover of 150 million euros.
  • EU companies with over 250 employees and a worldwide net turnover of forty million euros of which at least fifty per cent was generated in high-risk sectors. Think of the production of textiles and leather, agriculture and fishing, and the extraction of mineral resources.
  • Non-EU companies with a net turnover of 150 million euros in the EU.
  • Non-EU companies with a net turnover of forty million euros in the EU of which at least fifty per cent was generated in high-risk sectors.
• The general approach also stated that it is up to the Member States to decide whether or not they should apply the directive to regulated financial undertakings and pension institutions that are considered to be social security schemes under applicable EU law.

Amendment of definitions (article 3)

• The definition of the ‘established business relationship’ as proposed by the Commission was deleted since the whole concept was abandoned. Instead, only the definition of ‘business partner’ is used.

• The general approach amends the term ‘value chain’ into ‘chain of activities’, which is seen as a more neutral term in order to reflect divergent views of member states on the issue of whether to cover the whole ‘value chain’ or limit the scope to the ‘supply chain’.
  
  The term ‘chain of activities’ has a more limited meaning than ‘value chain’, as it only refers to a company's suppliers and excludes any consideration of how its products are used or how its services are provided. 

Due diligence at a group level (article 4a)

• The general approach introduces a provision allowing companies to fulfill some of the due diligence obligations at a group level. In order to make due diligence more effective and reduce the burden on companies, the general approach states that companies should be entitled to share resources and information within their respective groups of companies and with other legal entities.
• In order to be allowed to fulfil certain obligations on behalf of the subsidiaries several conditions must be met (e.g. the subsidiary must provide all necessary information to the parent company and cooperate with the parent company to fulfil its obligations under the CSDD).
• The general approach further states that the fulfilment of due diligence obligations at a group level should be without prejudice to the civil liability of subsidiaries in respect to victims to whom the damage is caused.

Prioritisation of identified actual and potential adverse impacts (article 6a)

The general approach introduces a new provision on prioritisation of adverse impacts. When it is not possible to address all the adverse impacts at the same time, companies shall prioritise the adverse impacts based on their severity and likelihood, and first address the most significant ones before moving on to the less significant ones. 

Severity of an adverse impact shall be assessed based on its gravity, the number of persons or the extent of the environment affected, and the difficulty to restore the situation prevailing prior to the impact.

Remuneration (article 15)

The provision linking the variable remuneration of directors to their contribution to the company’s business strategy and long-term interest and sustainability has been deleted.

The general approach states in this regard that the form and structure of directors’ remuneration are matters primarily falling within the competence of the company and its relevant bodies or shareholders.

Civil liability (article 22)

The provision on civil liability has been amended significantly in order to achieve legal clarity, certainty for companies and to avoid unreasonable interference with the member states’ tort law systems. 

The four conditions that have to be met in order for a company to be held liable are clarified and the element of fault was included:

• a damage caused to a natural or legal person;

• a breach of the duty;

• the causal link between the damage and the breach of the duty; and

• a fault (intention or negligence).

The right of victims of human rights or environmental adverse impacts to full compensation are expressly provided for in the general approach. On the other hand, the right to full compensation should not lead to overcompensation, for example by means of punitive damages

Further, clarifications of the joint and several liability of a company and a subsidiary or a business partner and the overriding mandatory application of civil liability rules were made. All of these clarifications and precisions allowed to delete the safeguard for companies that sought contractual assurances from their indirect business partners after a strong criticism of this provision due to its heavy reliance on contractual assurances.

Directors’ duty of care (article 25 and 26)

The proposal regulated directors’ duty of care (article 25) and laid down the duty for directors of EU companies to set up and oversee the due diligence actions and to adapt the corporate strategy to take into account the identified adverse impacts and adopted due diligence measures (article 26). 

Due to the strong concerns expressed by member states that considered article 25 to be an inappropriate interference with national provisions regarding directors’ duty of care, and potentially undermining directors’ duty to act in the best interest of the company, the provisions have been deleted in the general approach. 

As the content of article 26 was closely linked to the due diligence process, the article was deleted and its main elements were moved to the provision on integrating due diligence into the company’s policies and risk management systems, taking into account the variety of corporate governance systems and the freedom of companies to regulate their internal matters.

Other amendments

• The general approach applies a longer transposition period, in addition to the phase-in period mentioned above. This longer transition period allows companies to better prepare for the obligations of the CSDD.

• The general approach clarifies the definitions of ‘adverse environmental impact’ and ‘adverse human rights impacts’.

• According to the general approach, companies should update their due diligence policy without undue delay after a significant change occurs, but at least every 24 months. A significant change should be understood as such a change to the status quo of the company’s own operations, the operations of its subsidiaries or business partners, the legal or business environment or any other substantial shift from the situation of the company that the company could be reasonably expected to react to and update the policy.

• The general approach provides companies better guidelines as to how they should assess which measures are appropriate when aiming to prevent, mitigate or end adverse impacts.

• The general approach gives more options to terminate or temporarily suspend a relationship with a business partner, if none of the appropriate measures taken to change the adverse impact have succeeded.

• The general approach introduces an exemption from the obligation to monitor adverse effects for regulated financial undertakings providing financial services, which only have to monitor the negative effects that were identified within the operations of the companies’ business partner prior to providing the financial services.

• The proposal has been more aligned with the recently adopted Corporate Sustainability Reporting Directive (CSRD).