On 14 December 2023, there was an initial agreement by the EU Parliament and the EU Council on the final text of the Corporate Sustainability Due Diligence Directive (“CSDDD”).

CSDDD is a significant and impactful piece of legislation that will require in‑scope companies to carry out due diligence and mitigate actual and potential adverse impacts on human rights and the environment.

We cover here some of the key requirements that have been keenly negotiated and now agreed upon based on the publications released so far with the final compromise text not yet available:

  • Financial services firms will at least temporarily not have within scope their downstream activities but are required to report on own operations, upstream value chain and climate transition plans.  This is temporary as there will be a review clause for possible future inclusion.
  • EU companies with more than 500 employees and a net global turnover above €150 million and non‑EU companies with more than €300 million net EU turnover will be subject to the new rules.  Further clarity is required on the non‑EU capture, and it may be aligned with the Corporate Sustainability Reporting Directive for non‑EU entities, i.e., that there needs to be an EU subsidiary or branch.
  • Certain companies operating within specified high‑risk sectors will also fall within scope of reporting with a lower threshold of 250 employees and €40 million turnover in the EU.  High‑risk sectors include textiles, clothing and footwear manufacture and wholesale trade, agriculture including forestry and fisheries, manufacture of food and trade of raw agricultural materials, extraction and wholesale trade of mineral resources or manufacture of related products and construction.
  • The key requirement is to apply due diligence by identifying, assessing, preventing, mitigating, ending and remedying any negative impact on human rights and the environment (as defined by an annex to the directive).
  • Large companies will need to adopt and implement a climate transition plan, aligned to the Paris Agreement of 1.5 degrees Celsius (this aligns with Corporate Sustainability Reporting Directive requirements).
  • For companies with over 1000 employees, directors’ variable remuneration may be linked to the climate transition plan.
  • There is a widened scope on human rights with new elements added, particularly on vulnerable groups and ILO core conventions.
  • Non‑compliant companies may face penalties totalling 5% of the company’s net turnover.
  • Persons affected and concerned by adverse impacts, including trade unions and civil society organisations, can bring a claim for a period of up to five years after the damage occurred.  This is where there was a case of damage caused by a company through intent or negligence, provisions on the disclosure of evidence, injunctive measures and the cost of the proceedings.
  • As a last resort, if a company identifies adverse impacts on environment or human rights by some of their business partners, they will have to end those relationships when the impacts cannot be prevented or ended.

In terms of next steps, there still needs to be endorsement and formal adoption by both the European Parliament and European Council before CSDDD will be published in the Official Journal and enter into force 20 days later.

Timing will need to be reviewed in the final text, however, early review of the requirements is recommended to help ensure compliance and particularly with consideration to the sanctions provisions included.

For further information, please contact ukreg@proskauer.com.

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Photo of John Verwey John Verwey

John Verwey is a partner in the Private Funds Group. John advises on a wide number of regulatory issues at a national UK and European level, including firm authorisations, appointed representative arrangements, change in control, market abuse. He represents a variety of clients…

John Verwey is a partner in the Private Funds Group. John advises on a wide number of regulatory issues at a national UK and European level, including firm authorisations, appointed representative arrangements, change in control, market abuse. He represents a variety of clients that range from small start-up fund managers to established global fund advisers and managers.

A particular area of focus for John is Alternative Investment Fund Managers Directive (AIFMD) and Markets in Financial Instruments Directive II (MiFID II).  This includes advising on pre-marketing and marketing strategies for fund managers, advising on the Level One and Lever Two requirements under AIFMD and implementing UK rules and legislation, and advising on the organizational and conduct of business requirements under MiFID II.

Photo of Amar Unadkat Amar Unadkat

Amar Unadkat is a special regulatory counsel in the Corporate Department and a member of the Private Funds Group.

Amar advises on a variety of financial services regulatory and compliance matters both from a UK and European perspective. Amar regularly advises his clients…

Amar Unadkat is a special regulatory counsel in the Corporate Department and a member of the Private Funds Group.

Amar advises on a variety of financial services regulatory and compliance matters both from a UK and European perspective. Amar regularly advises his clients on issues relating to the Alternative Investment Fund Managers Directive (“AIFMD”), the second Markets in Financial Instruments Directive (“MiFID II”), as well as the latest ESG developments. Amar also focusses on UK regulatory compliance matters, including the FCA’s change of control regime, the appointed representative regime and the Senior Managers & Certification Regime.

Amar’s clients include private equity firms, investment managers and advisers, firms in the FinTech space, wealth management businesses, banks and sovereign wealth funds.

Photo of Rachel Lowe Rachel Lowe

Rachel E. Lowe is a special regulatory counsel in the Corporate Department and a member of the Private Investment Funds Group.

Rachel advises on financial services regulation specializing in sustainable finance and ESG regulation. She has particular expertise in drafting and advising on…

Rachel E. Lowe is a special regulatory counsel in the Corporate Department and a member of the Private Investment Funds Group.

Rachel advises on financial services regulation specializing in sustainable finance and ESG regulation. She has particular expertise in drafting and advising on the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation. Rachel has also supported with EU MiFID and AIFMD sustainability updates for clients, including from a governance and organizational perspective, as well as providing drafting and training support. She also advises on the Corporate Sustainability Reporting Directive (CSRD), including analysis of its applicability for large international group structures.

From a UK perspective, Rachel supports clients with the TCFD-related requirements in the Financial Conduct Authority’s ESG Sourcebook and is increasingly engaged on the UK’s Sustainability Disclosure Requirements (SDR).

More broadly, Rachel has worked with litigation colleagues to assist clients with understanding and mitigating greenwashing-related legal and regulatory risk.

Photo of Michael Singh Michael Singh

Michael is an associate in the Private Funds Group in the Corporate Department.

Michael advises clients on a variety of regulatory issues both from a UK and European perspective. He also helps clients on fund related transactions. His clients include private equity firms…

Michael is an associate in the Private Funds Group in the Corporate Department.

Michael advises clients on a variety of regulatory issues both from a UK and European perspective. He also helps clients on fund related transactions. His clients include private equity firms, investment managers, FinTech companies and wealth management businesses.

He is dual-qualified as a German lawyer (“Rechtsanwalt”) and Solicitor of England and Wales and previously was in-house counsel at Deutsche Bank.

Photo of Sulaiman Malik Sulaiman Malik

Sulaiman Malik is an associate in the Corporate Department and a member of the Private Funds Group.

Sulaiman advises clients on a range of UK and international financial regulation. He advises private equity funds, hedge funds, sovereign wealth funds and other asset managers…

Sulaiman Malik is an associate in the Corporate Department and a member of the Private Funds Group.

Sulaiman advises clients on a range of UK and international financial regulation. He advises private equity funds, hedge funds, sovereign wealth funds and other asset managers, as well as banks, FinTechs, broker-dealers and governments.

Prior to joining Proskauer, Sulaiman trained at Simmons & Simmons in London, where he was seconded to Brevan Howard. He has also spent time at the UK’s Ministry of Justice and as an adviser to the Mayor of Brisbane, in Australia.

Sulaiman is a passionate advocate for diversity and inclusion. He previously worked at Rare, a market-leading diversity consultancy, and provides pro bono legal advice to a range of community and civil rights organizations.