Last December, the European institutions agreed on the main outlines of the EU Corporate Sustainability Due Diligence Directive (CSDDD). The stated objective of this directive is “to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance”.[1] While the directive has been welcomed as a significant step towards corporate accountability, it has some major shortcomings, such as the exclusion of important parts of the financial sector. Once the directive has been adopted, the Luxembourg government will have to transpose it into national law and by doing so, will have the opportunity to be more ambitious on certain key points to bring the legislation in full compliance with international human rights standards.
What is in the directive?
Almost two years after the European Commission presented the first proposal of a directive on corporate sustainability due diligence,[2] the European institutions reached a provisional agreement on a text in December 2023. The directive sets out rules for companies on the impact of their business activities on human rights and the environment. Companies need to integrate due diligence procedures into their management systems and adopt and implement a transition plan for climate change mitigation.
Although the agreed text has not yet been published[3] and many technical details still need to be refined before formal adoption by the Council of the EU and the European Parliament, some key elements were revealed in the press releases[4] on the agreement reached between the two EU legislative bodies.
- Scope of application: the directive will apply to EU-based companies with more than 500 employees and a net global turnover of more than 150 million euro. In high-risk sectors such as textile manufacturing, agriculture, mineral resources and construction, the thresholds are lower and the directive will apply to companies with more than 250 employees and a turnover of more than 40 million euro. The directive also seems to apply to non-EU companies with an equivalent turnover in the EU (although the different press releases contain conflicting information on this point).
- Financial sector: the inclusion of the financial sector within the scope of the directive was one of the most disputed aspects during the months leading up to the agreement, with fierce resistance from financial sector lobbyists. According to the Council’s press release, financial services will be temporarily excluded from the scope of the directive but there will be a review clause for the possible future inclusion of the downstream financial sector. Financial undertakings thus fall under the scope of the directive (e.g., they will have to adopt and implement a transition plan for climate change mitigation), but not their financing activities. In other words, financial institutions will only have to conduct due diligence on their own operations and supply chain (upstream activities) but not on their clients, which excludes financial services (downstream activities).
- Access to justice: the directive improves access to justice for victims to effectively seek and obtain compensation. Victims will have the possibility to be legally represented by NGOs and trade unions, which could contribute to facilitating access to legal representation. Courts will be able to require companies to disclose internal documents that could constitute evidence in support of victims’ claims. However, there will be a five-year deadline for victims to file claims, which is problematic given the complexity of litigating across various jurisdictions.[5]
- Supervision and liability: each EU member state will designate a supervisory authority to monitor compliance with the directive. Companies failing to meet their due diligence obligations may be held responsible and penalties may be imposed. Victims will be entitled to compensation.
The position of Luxembourg
In the run-up to the 8 October 2023 parliamentary elections, the Initiative pour un devoir de vigilance (IDV) asked the main candidates of the seven political parties represented in parliament about their positions on future legislation on business and human rights.[6] Luc Frieden (CSV) and Lex Delles (DP) responded on behalf of the two parties that make up the new coalition government:
- Scope of application: while the CSV was in favour of a scope of 250 employees and a turnover of 40 million, the DP did not provide a clear answer to this question.
- Financial sector: the CSV was in favour of including the financial sector, taking into account its specific characteristics. The DP, however, was against its inclusion. Lex Delles argued that investment funds only have the task of managing investors’ assets and that these assets would be subject to the provisions of the directive.[7]
- Access to justice: both CSV and DP were in favour of allowing courts to order companies to disclose evidence under their control.
In its coalition programme adopted in November 2023,[8] the government stated that it would support the EU Council’s position in the negotiations on the CSDDD. Without going into further detail on the directive, the document warned that the “main burden and costs of implementing the supply chain legislation will be passed on to businesses” and stated the intention to ensure that “these measures are proportionate and that a level playing field is maintained at the global level, particularly with regard to the introduction of new administrative burdens”.[9]
What comes next? Challenges and opportunities
After the formal adoption of the CSDDD by the Council of the EU and the European Parliament (expected in April 2024), the directive will be published and enter into force. It will then be up to each EU member state to transpose the directive into national law, and they generally have two years to do so. When transposing the law, member states can go beyond the directive in certain areas. This gives the Luxembourg government the opportunity to take more ambitious positions, for example on the following aspects:
- Scope of application (company size): in its current version, the EU directive only covers very large companies (more than 500 employees and a net worldwide turnover of more than 150 million euro). In Luxembourg, these thresholds leave an estimated 99 per cent of all companies out of scope. To make the legislation more effective, the Luxembourg law should consider lower thresholds in order to include a larger number of Luxembourg-based companies. For example, the draft law on corporate sustainability due diligence prepared by the Initiative pour un devoir de vigilance[10] proposes that the legislation should apply to companies that meet two of the following three criteria: 1. more than 250 employees, 2. an annual turnover of more than 50 million euro, and 3. a balance sheet total of more than 43 million euro. Even if the business-friendly approach of the current government does not allow for too much hope on this point, it should be remembered that during the 2023 election campaign, Luc Frieden was in favour of lower thresholds than those currently provided for in the CSDDD.
- Financial sector: the exclusion of the financial sector from the scope of application of the CSDDD is not only arbitrary but also at odds with international human rights standards. The United Nations Guiding Principles on Business and Human Rights,[11] endorsed in 2011, explicitly state that the responsibility to conduct human rights due diligence applies to all business enterprises, regardless of their sector, size, location, ownership or structure. Subsequently, the Organisation for Economic Co-operation and Development[12] as well as the International Labour Organization[13] have incorporated the UNGPs into their respective frameworks on business and human rights. Hence, in order to be fully compliant with international human rights standards, any Luxembourgish legislation on corporate business conduct should include the entire financial sector.
As a reminder, the UN Working Group on human rights and transnational corporations, following its visit to Luxembourg in December 2022, explicitly called upon Luxembourg to take a stronger position in favour of the full inclusion of the financial sector, including investment funds, both in the proposed directive and in its own legislation.[14]
In this context, Lex Delles’ argument against the inclusion of the investment fund sector – that investment funds only manage assets, and that these assets are subject to the provisions of the directive anyway – should also be criticised. This is not always the case, as assets are not necessarily covered by the directive, for example in the case of investments in companies which do not fall within the scope of the CSDDD because of their size or because they are domiciled in countries not covered by the directive. What’s more, the aim of the directive is precisely to multiply responsibilities throughout the value chain. For example, if a company in which an investment fund holds shares fails to respect human rights, even though it is subject to the directive, the investor should, in accordance with the objective of the directive, verify for himself whether the investee company respects human rights.
- Scope of application (risk sectors): as mentioned above, the CSDDD provides for lower thresholds for companies operating in high-risk sectors. Luxembourg’s legislation could extend the CSDDD list of high-risk sectors by taking into account the specificities of the country’s economy. In this respect, the legislator should consider the latest National Action Plan on Business and Human Rights.[15] This plan identified a number of economic sectors as particularly exposed to the risk of human rights violations based on their importance in the national economy, the statistical data available on the sector-specific risk level, and the potential risk of human rights violations due to a sector’s technological evolution. This list of high-risk sectors included the financial sector.
- Access to justice: given the complexity of multi-jurisdictional litigation and in order to provide real access to justice to victims of human rights violations, the five-year deadline for filing claims should be extended to 10 years, as suggested in the IDV draft law.
Finally, the Luxembourg government will have to push the European Commission to actually apply the announced review clause within two years and to amend the CSDDD to include all downstream and upstream activities of the financial industry. Doing so is an opportunity for Luxembourg to truly deliver on its commitment to human rights.
Footnotes:
[1] https://commission.europa.eu/business-economy-euro/doing-business-eu/corporate-sustainability-due-diligence_en
[2] Proposal for a Directive on corporate sustainability due diligence and annex, European Commission, 23 February 2022, https://commission.europa.eu/publications/proposal-directive-corporate-sustainability-due-diligence-and-annex_en (viewed 29 January 2024).
[3] by the editorial deadline of 22 January2024
[4] Council of the EU (2023), Corporate sustainability due diligence: Council and Parliament strike deal to protect environment and human rights, press release, 14 December 2023, www.consilium.europa.eu/en/press/press-releases/2023/12/14/corporate-sustainability-due-diligence-council-and-parliament-strike-deal-to-protect-environment-and-human-rights/pdf (viewed 29 January 2024), European Parliament (2023), Corporate due diligence rules agreed to safeguard human rights and environment, press release, 14 December 2023, www.europarl.europa.eu/pdfs/news/expert/2023/12/press_release/20231205IPR15689/20231205IPR15689_en.pdf (viewed 29 January 2024).
[5] European Coalition for Corporate Justice (2023), CSDDD political deal: A pivotal step but a missed opportunity to embrace transformative change, press release, 14 December 2023, https://corporatejustice.org/news/press-release-csddd-political-deal-a-pivotal-step-but-a-missed-opportunity-to-embrace-transformative-change/ (viewed 29 January 2024).
[6] Initiative pour un devoir de vigilance (2023), Paulette Lenert, Sam Tanson, Marc Baum et Sven Clement: une forte coalition pour les droits humains, 21 September 2023, www.initiative-devoirdevigilance.org/post/paulette-lenert-sam-tanson-marc-baum-et-sven-clement-une-forte-coalition-pour-les-droits-humains (viewed 29 January 2024).
[7] “Le rôle de la place financière, par le biais notamment des fonds d’investissement, est celui de gérer le patrimoine des investisseurs. Comme les actifs sous-jacents seront, selon les dispositions de la directive, soumis au devoir de vigilance, il n’est pas opportun d’inclure le secteur financier dans le champ d’application.“ (ibid.)
[8] Accord de coalition 2023-2028, https://gouvernement.lu/fr/publications/accord-coalition/accord-de-coalition-2023-2028/accord-de-coalition-2023-2028.html (viewed 29 January 2024).
[9] “Il ne faut cependant pas perdre de vue que la charge principale et les coûts de la mise en œuvre de la législation sur la chaîne d’approvisionnement se répercuteront sur les entreprises. Le Gouvernement veillera dès lors à la proportionnalité de ces mesures ainsi qu’au maintien de conditions équitables de concurrence (level playing field) à l’échelle globale, notamment en ce qui concerne l’introduction de nouvelles charges administratives“ (Accord de coalition 2023-2028, p. 25)
[10] Clement, S., Oberweis, N. (2023), Proposition de loi relative au devoir de vigilance des entreprises en matière de durabilité, Chambre des Députés, nr. 8217, 16 May 2023, www.chd.lu/fr/dossier/8217 (viewed 29 January 2024).
[11] United Nations (2011), Guiding Principles on Business and Human Rights, New York and Geneva, 2011, www.ohchr.org/sites/default/files/documents/publications/guidingprinciplesbusinesshr_en.pdf (viewed 29 January 2024).
[12] Organisation for Economic Co-operation and Development (2023), OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, Paris, 8 June 2023, www.oecd.org/publications/oecd-guidelines-for-multinational-enterprises-on-responsible-business-conduct-81f92357-en.htm (viewed 29 January 2024).
[13] International Labour Organization (2022), Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, 6th edition, Geneva, 2022, www.ilo.org/wcmsp5/groups/public/—ed_emp/—emp_ent/—multi/documents/publication/wcms_094386.pdf (viewed 29 January 2024).
[14] United Nations General Assembly (2023), Visit to Luxembourg – Report of the Working Group on the issue of human rights and transnational corporations and other business enterprises, Geneva, 19 April 2023, www.ohchr.org/en/documents/country-reports/ahrc5324add2-visit-luxembourg-report-working-group-issue-human-rights-and (viewed 29 January 2024).
[15] Ministère des Affaires étrangères et européennes (2020), Plan d’action national du Luxembourg pour la mise en œuvre des Principes directeurs des Nations Unies relatifs aux entreprises et aux droits de l’Homme, Luxembourg, 2020, https://maee.gouvernement.lu/dam-assets/directions/d1/pan-entreprises-et-droits-de-l-homme/2020-2022/PAN-LU-entreprises-et-DH-2020-2022-FR.pdf (viewed 29 January 2024).
