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Another step of the Fair and Sustainable Economy package: the Corporate Sustainability Due Diligence Directive

In February 2022, the European Commission proposed the Corporate Sustainability Due Diligence Directive (CSDD), which aims to hold companies accountable for human rights and environmental violations along their value chain. The proposed legislation would oblige large companies with a turnover of more than €150 million and smaller companies in risk sectors to identify, prevent and mitigate human rights and environmental violations along their value chains. SMEs were excluded from the scope of the directive. The European Parliament's Legal Affairs Committee voted in favour of the text on 25 April 2023, paving the way for a plenary vote on 1 June.

The proposed directive establishes the rules governing due diligence obligations to ensure that companies identify, prevent and mitigate adverse impacts on human rights or the environment arising from their activities.

Companies would be required to identify and, where necessary, prevent, eliminate or mitigate the negative impacts of their activities, including those of their business partners, on human rights and the environment. This includes child labour, slavery, labour exploitation, pollution, environmental degradation and biodiversity loss.

The compromise text of MEPs called for the screening rules to apply to the financial sector, but in the end, in their common position, they decided that the inclusion of financial services in the mandatory screening obligation would remain optional for Member States. The report also calls for directors of companies with more than 1,000 employees to be made responsible for due diligence and for part of their variable remuneration to be linked to the company's transition plans. In their negotiating positions, Member States opposed the link between the due diligence obligation and directors' remuneration. Companies that fail to comply would be held liable for damages and EU governments would set up supervisory authorities with the power to impose sanctions. MEPs want fines to be at least 5% of net world market turnover and non-compliant third-country firms to be banned from public procurement. On climate protection, MEPs voted to introduce climate protection plans in line with the objectives of the Paris Agreement.

The Parliament is expected to vote on the report in plenary on 1 June, while negotiations with EU member states will start during the summer.