Executive Summary
In February 2022, the European Commission published a proposed Directive on Corporate Sustainability Due Diligence (the “proposal”). The intention of the proposal is to create a cross-sectoral framework for businesses operating in the single market requiring them to identify, prevent, mitigate and account for their adverse human rights and environmental impacts in their value chain, whilst also requiring that firms have adequate governance, management systems and measures in place to this end. Under the Commission Proposal, EU investment managers and/or funds would be in scope of the requirements as regulated financial undertakings providing loan, credit, or other financial services. The proposal would require that in-scope companies conduct human rights and environmental due diligence with regard to their own operations or established business relationships in their value chain.
A political agreement was announced by the co-legislators on 13 December 2023. While the financial sector is excluded, the rules will be applicable generally to AIFMS, UCITS management companies, investment firms, banks and other financial institutions as “companies”, as defined under the Directive. The previous drafting in Parliament and Council texts regarding specific rules for the financial sector when making investments has been deleted however.
Relatively high threshold requirements are included in the Directive and state that the rules apply to those companies which either (a) had more than 1,000 employees on average and had a net worldwide turnover of more than EUR 450 million in the last financial year for which annual financial statements have been or should have been adoptedor (b) is the ultimate parent company of a group that reaches the thresholds in the last consolidated financial year statements – or (c) companies which are formed in accordance with the legislation of a third country and generated a net turnover of more than EUR 450 million in the European Union in the financial year preceding the last financial year.
Recital 19 of the Directive explains: “[f]or regulated financial undertakings, the definition of the term ‘chain of activities’ should not include downstream business partners that are receiving their services and products. Therefore, as regards regulated financial undertakings only the upstream but not the downstream part of their chain of activities is covered by this Directive.” This is further explained by Recital 43 which states: [f]inancial undertakings should carry out periodic assessment only of their own operations, those of their subsidiaries and of their upstream business partners.”
The review clause in the Directive explains that the Commission will have to prepare a report “at the earliest possible opportunity” but no later than 2 years after entry into force, i.e. mid-2026, on the need to cover the provision of financial services and investment activities. The report should be accompanied, if appropriate, by a legislative proposal.
Following the political agreement at trialogue level, the Council managed to approve the deal in March while the European Parliament approved it in April. The publication of the final Directive in the Official Journal of the EU is expected in June 2024.
Please contact Adam Jacobs-Dean or Danny O'Connell with any questions regarding these proposals.
-
Adam Jacobs-Dean
Managing Director, Global Head of Markets, Governance and Innovation
-
Danny O'Connell
Head of Brussels Office, AIMA
Practical Implications
The Directive is expected to present the following practical implications:
- For asset managers and investors, the activities of a company’s upstream business partners will need to be subject to due diligence in relation to the production of goods or the provision of services by the company, including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of the products and development of the product or the service. This is a potentially very wide definition and remains to be seen how it will be applied in practice.
- In-scope companies are required to adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement.
- Article 22 on civil liability provides that a company can be held liable for damage caused to a natural or legal person provided that the company either intentionally or negligently fails to comply with the Directive. This raises the possibility that an asset manager or investor could be liable to a 3rd party for failure to comply with obligations under the Directive.
Timeline
AIMA has categorized this proposal as Low Priority/Medium Impact and it is therefore represented in lime green in the AIMA Regulatory Horizon Scan gantt chart.
Estimated Compliance Date4 | 30 June 2027 |
Commission report & possible legislative proposal on due diligence requirements for financial undertakings | 30 June 2026 |
Estimated Transposition Date3 | 30 June 2026 |
Estimated Effective Date2 | 30 June 2024 |
Estimated Publication Date1 | 10 June 2024 |
Final JURI Report & Parliament Position for Trialogues | 8 May 2023 |
Final ECON Position for Trialogues | 6 March 2023 |
Council general approach | 1 December 2022 |
AIMA Position Paper/Response to Proposal on CSDDD | 9 August 2022 |
Proposed Directive (and related proposed annexes) published by European Commission | 23 February 2022 |
- We have assumed that the European Parliament and the Council will approve their agreement through the so-called “corrigendum” procedure (i.e. vote on the English version only in the current legislative cycle followed by full adoption in September/October and publication in the Official Journal in December 2024).
- The Directive will enter into force on the twentieth day following its publication in the Official Journal of the EU.
- Member States are given 2 years to transpose the Directive into national law.
- The Directive lays down an implementation period of 1 year for the largest companies in scope.
Pending Implementing Measures
CSDDD Article | Description | Due Date |
---|---|---|
Article 11a(4) | Commission implementing measures on structure of information to be contained in annual statement to be accessible with European Single Access Point (ESAP). | No due date specified |
Article 29 | Commission report & if appropriate, legislative proposal on additional sustainability due diligence requirements tailored to regulated financial undertakings with respect to the provision of financial services and investment activities, and the options for such due diligence requirements as well as their impacts. | 30 June 2026 |