The Council has adopted its negotiating position ('general approach') on the corporate sustainability due diligence directive. This directive will enhance the protection of the environment and human rights in the EU and beyond.

Jozef Síkela, Czech Minister for Industry and Trade appeals in the official statement:

"We have worked hard over the last months to reach this Council position today. For the EU to reach its climate and sustainability goals and to ensure the protection of human rights, it is important that companies identify and prevent, bring to an end or mitigate the impact of their activities on human rights and the environment. Responsible behaviour for companies producing clothes, mobile phones and other everyday use objects is also something European customers start caring about more and more".

The due diligence directive lays down rules on obligations for large companies regarding actual and potential adverse impacts on human rights and the environment, with respect to their own operations, those of their subsidiaries, and those carried out by their business partners. It also lays down rules on penalties and civil liability for violating those obligations. Lastly, it lays down obligations for companies to adopt a plan ensuring their business model and strategy are compatible with the Paris Agreement.

The directive will help the EU to transition towards a more climate-neutral and green economy as described in the European Green Deal and the UN Sustainable Development Goals.

Parties concerned

The rules of the due diligence directive apply to large EU companies and to non-EU companies active in the EU.

For EU companies, the criteria that determine whether a company falls within the scope of the directive are based on the number of employees and the company’s net worldwide turnover, whereas in the case of non-EU companies the criterion is related to the net turnover generated in the EU.

If a non-EU company fulfils the criterion regarding net turnover generated in the EU, it will fall under the scope of the due diligence directive, irrespective of whether it has a branch or a subsidiary in the EU.

The Council’s text has introduced a phase-in approach regarding the application of the rules laid down in the directive. The rules would first apply to very large companies that have more than 1000 employees and €300 million net worldwide turnover or, for non-EU companies, €300 million net turnover generated in the EU, 3 years from the entry into force of the directive.

Definitions

According to the Council’s text, the rules of the directive will apply to a company’s ‘chain of activities’, which covers a company’s upstream and in a limited manner also downstream business partners as it leaves out the phase of the use of the company’s products or the provision of services.

The Council’s text also strengthens the risk-based approach and the rules on the prioritisation of the adverse impacts to ensure that carrying out due diligence obligations is feasible for companies.

The EC text provides more clarity to the conditions of civil liability, a provision that ensures full compensation for damages resulting from a company's failure to comply with the due diligence obligations.

The general approach reached on the December 1 completes the negotiating position agreed by the Council. It provides the Council presidency with a mandate to start negotiations with the European Parliament.

How it affects our banks

Starting with 2024 all European Banks are to report on how transition and physical risks of climate change will impact their lending books. The overall alignment goes to EU green taxonomy based on two newly introduced metrics: the Green Asset Ratio (GAR), to capture proportion of green loans made to large European companies, and the Banking Book Taxonomy Alignment Ratio (BTAR), which is assessment of a bank's broader balance sheet.

The EU Taxonomy is a first-of-its-kind classification instrument to help financial players and companies determine which activities are in line with Europe’s environmental and climate objectives. To tackle the greenwashing risk, the taxonomy provides a clear, science-based classification of economic activities. Banks are expected to report to which extent they support economic activities that contribute substantially to achieving the EU’s net zero target in 2050. While a considerable amount of data needed to meet these reporting obligations will be provided through the EU Taxonomy disclosures of banks’ clients, this is not true in all cases.

The European Banking Federation, together with the United Nations Environment Programme Finance Initiative (UNEP FI), on 26 January 2021 launched a report that for the first time assesses how the EU Taxonomy can be applied to core banking products. The report is based on case studies analysing transactions and existing client relationships across a large spectrum of sectors, economic activities and geographical locations.

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