Preamble 51 to 60.
(51) Although regulated financial undertakings are only subject to due diligence obligations for the upstream part of their chains of activities, the specificities of financial services as well as the MNE Guidelines provide indications of the types of measures that are appropriate and effective for financial undertakings to take in due diligence processes. As it is highlighted also in the MNE Guidelines, the specificities of financial services need to be acknowledged.
Regulated financial undertakings are expected to consider adverse impacts and to use their so-called ‘leverage’ to influence companies. The exercise of shareholders’ rights can be a way to exercise leverage.
(52) As regards direct and indirect business partners, industry and multi-stakeholder initiatives can help create additional leverage to identify, mitigate, and prevent adverse impacts. Therefore it should be possible for companies to participate in such initiatives to support the implementation of obligations laid down in Articles 7 to 16 of this Directive to the extent that such initiatives are appropriate to support the fulfilment of those obligations.
The meaning of the term ‘initiatives’ is broad and includes a combination of voluntary due diligence procedures, tools and mechanisms, developed and overseen by governments, industry associations, interested organisations, including civil society organisations, or groupings or combinations thereof, that companies could participate in in order to support the implementation of due diligence obligations.
Companies could, after having assessed their appropriateness, make use of or join relevant risk analysis carried out by industry or multi-stakeholder initiatives or by members of those initiatives and could take or join effective appropriate measures through such initiatives. When doing so, companies should monitor the effectiveness of such measures and continue to take appropriate measures where necessary to ensure the fulfilment of their obligations. In order to ensure full information on such initiatives, this Directive should also refer to the possibility for the Commission and the Member States to facilitate the dissemination of information on such initiatives and their outcomes.
The Commission, in collaboration with Member States, should issue guidance setting out fitness criteria and a methodology for companies to assess the fitness of industry and multi-stakeholder initiatives. Companies could also use independent third-party verification on and from companies in their chains of activities to support the implementation of due diligence obligations to the extent that such verification is appropriate to support the fulfilment of the relevant obligations. Independent third-party verification could be carried out by other companies or by an industry or multi-stakeholder initiative.
Independent third-party verifiers should act with objectivity and complete independence from the company, be free from any conflict of interests, remain free from external influence, whether direct or indirect, and should refrain from any action incompatible with their independence. Depending on the nature of the adverse impact, they should have experience and competence in environmental or human rights matters and should be accountable for the quality and reliability of the verification.
The Commission, in collaboration with Member States, should issue guidance setting out fitness criteria and a methodology for companies to assess the fitness of third-party verifiers, and guidance for monitoring the accuracy, effectiveness and integrity of third-party verification. This guidance is essential to address the shortcomings of ineffective audits.
Companies participating in industry or multi-stakeholder initiatives or using third-party verification or contractual clauses to support the implementation of due diligence obligations should still be able to be penalised or found liable for violations of this Directive and damage suffered by victims as a result.
(53) Under the due diligence obligations provided for in this Directive, if a company identifies actual adverse human rights or environmental impacts, it should take appropriate measures to bring those to an end. It can be expected that a company is able to bring to an end actual adverse impacts in its own operations and those of its subsidiaries.
However, it should be clarified that, where adverse impacts cannot be brought to an end, companies should minimise the extent of such impacts. Minimisation of the extent of adverse impacts should require an outcome that is the closest possible to bringing the adverse impact to an end. Therefore, the company should periodically reassess the circumstances that prevented it from bringing the adverse impact to an end, and whether the adverse impact can be brought to an end.
To provide companies with legal clarity and certainty, this Directive should specify which actions companies should be required to take for bringing actual human rights and environmental adverse impacts to an end and for minimising their extent, where relevant depending on the circumstances. When assessing the appropriate measures to bring to an end or minimise the extent of the adverse impacts, due account should be taken of the so-called ‘level of involvement of the company in an adverse impact’ in line with the international frameworks and the company’s ability to influence the business partner causing or jointly causing the adverse impact.
Companies should take appropriate measures to bring to an end or minimise the extent of the adverse impacts that they cause by themselves (so-called ‘causing’ the adverse impact as referred to in the international framework) or jointly with their subsidiaries or business partners (so-called ‘contributing’ to the adverse impact as referred to in the international framework). This applies irrespective of whether third parties outside of the company’s chain of activities are also causing the adverse impact.
Jointly causing the adverse impact is not limited to equal implication of the company and its subsidiary or business partner in the adverse impact, but should cover all cases of the company’s acts or omissions, causing the adverse impact in combination with the acts or omissions of subsidiaries or business partners, including where the company substantially facilitates or incentivises a business partner to cause an adverse impact, that is, excluding minor or trivial contributions.
When companies are not causing the adverse impacts occurring in their chains of activities themselves or jointly with other legal entities, but the adverse impact is caused only by their business partner in the chains of activities of the companies (so-called ‘being directly linked to’ the adverse impact as referred to in the international framework), they should still aim to use their influence to bring to an end or minimise the extent of the adverse impact caused by their business partners or to increase their influence to do so. Using only the notion of ‘causing’ the adverse impact instead of the aforementioned terms used in the international frameworks avoids confusion with existing legal terms in national legal systems while covering the same causal relationships described in those frameworks.
In this context, in line with the international frameworks, the company’s influence on a business partner should include on the one hand its ability to persuade the business partner to bring to an end or minimise the extent of the adverse impacts (for example through market power, pre-qualification requirements or linking business incentives to human rights and environmental performance) and, on the other hand, the degree of influence or leverage that the company could reasonably exercise, for example, through cooperation with the business partner in question or engagement with another company which is the direct business partner of the business partner associated with the adverse impact.
(54) So as to comply with the obligation to bring to an end or minimise the extent of actual adverse impacts provided for in this Directive, companies should be required to take the following appropriate measures, where relevant. Where necessary due to the fact that the adverse impact cannot be immediately brought to an end, companies should develop and implement a corrective action plan.
Companies should seek to obtain contractual assurances from a direct business partner that it will ensure compliance with the code of conduct and, as necessary, the corrective action plan, including by seeking corresponding contractual assurances from its partners to the extent that their activities are part of the chains of activities of the companies.
Contractual assurances should be designed to ensure that responsibilities are shared appropriately by the company and the business partners. The contractual assurances should be accompanied by appropriate measures to verify compliance. However, the company should only be obliged to seek the contractual assurances, as obtaining them may depend on the circumstances.
Companies should also make financial or non-financial investments, adjustments or upgrades aiming at ceasing or minimising the extent of adverse impacts, and collaborate with other companies, in compliance with Union law. Where relevant, companies should adapt business plans, overall strategies and operations, including purchasing practices, and develop and use purchasing policies that contribute to living wages and incomes for their suppliers, and that do not encourage actual adverse impacts on human rights or the environment.
To conduct their due diligence in an effective and efficient manner, companies should also make necessary modifications of, or improvements to, their design and distribution practices, to address adverse impacts arising both in the upstream part and the downstream part of their chains of activities, before and after the product has been made.
Adopting and adapting such practices, as necessary, could be particularly relevant for the company to avoid an adverse impact in the first instance. Such measures could also be relevant to address adverse impacts that are jointly caused by the company and its business partners, for instance due to the deadlines or specifications imposed on them by the company. In addition, by better sharing the value along the chain of activities, responsible purchasing or distribution practices contribute to fighting against child labour, which often arises in countries or territories with high poverty levels.
Companies should also provide targeted and proportionate support for an SME which is a business partner of the company, where necessary in light of the resources, knowledge and constraints of the SME, including by providing or enabling access to capacity-building, training or upgrading management systems, and, where compliance with the code of conduct or the corrective action plan would jeopardise the viability of the SME, providing targeted and proportionate financial support, such as direct financing, low-interest loans, guarantees of continued sourcing, or assistance in securing financing. The notion of ‘Jeopardising the viability of an SME’ should be interpreted as possibly causing a bankruptcy of the SME or putting the SME in a situation where bankruptcy is imminent.
(55) In order to reflect the full range of options for the company in cases where actual adverse impacts could not be addressed by the described measures, this Directive should also refer to the possibility for the company to seek contractual assurances with the indirect business partner, with a view to achieving compliance with the company’s code of conduct or a corrective action plan, and conduct appropriate measures to verify compliance of the indirect business partner with the contractual assurances.
(56) When contractual assurances are obtained from an SME that is an indirect business partner, companies should assess whether the contractual assurances should be accompanied by appropriate measures for SMEs. When the SME requests to pay part of the cost, or in agreement with the company, the SME should be able to share the results of verification with other companies.
(57) In order to ensure that appropriate measures for the bringing to an end or minimising of actual adverse impacts are effective, companies should prioritise engagement with business partners in their chains of activities, instead of terminating the business relationship, as a last resort after attempting to bring actual adverse impacts to an end or to minimise their extent without success.
However, this Directive should also, for cases where actual adverse impacts could not be brought to an end or the extent adequately minimised by such appropriate measures, refer to the obligation for companies, as a last resort, to refrain from entering into new or extending existing relations with the partner in question and, where there is a reasonable prospect of change, by using or increasing the company’s leverage through the temporary suspension of the business relationship with respect to the activities concerned, adopt and implement an enhanced corrective action plan for the specific adverse impact without undue delay including a specific and appropriate timeline for the adoption and implementation of all actions therein, during which the company may also seek alternative business partners.
Factors determining the appropriateness of the timeline for adoption and implementation of those actions could include the severity of the adverse impact, the need to identify and take steps to bring to an end or minimise the extent of any additional adverse impacts, as well as impacts on SMEs or smallholders.
Companies should suspend their business relationships with the business partner, thereby increasing their leverage and increasing the chances that the impact is addressed. Where there is no reasonable expectation that those efforts would succeed, for instance, in situations of state-imposed forced labour, or where the implementation of the enhanced corrective action plan failed to bring to an end or minimise the extent of the adverse impact, the company should be required to terminate the business relationship with respect to the activities concerned if the actual adverse impact is severe.
In order to allow companies to fulfil that obligation, Member States should provide for the availability of an option to terminate the business relationship in contracts governed by their laws. In deciding to terminate or suspend a business relationship, the company should assess whether the adverse impacts of doing so could be reasonably expected to be manifestly more severe than the adverse impact that could not be brought to an end or the extent of which could not be adequately minimised.
Where companies temporarily suspend or terminate the business relationship, they should take steps to prevent, mitigate, or bring to an end the impacts of suspension or termination, provide reasonable notice to the business partner and keep that decision under review. It is possible that bringing to an end adverse impacts at the level of indirect business relationships requires collaboration with another entity. In some instances, collaboration with another company could be the only realistic way of bringing to an end actual adverse impacts at the level of indirect business relationships, in particular where the indirect business partner is not ready to enter into a contract with the company.
(58) Where a company has caused or jointly caused an actual adverse impact, the company should provide remediation. The term ‘remediation’ means restoring the affected person or persons, communities or environment to a situation equivalent or as close as possible to the situation they would have been in had the actual adverse impact not occurred, proportionate to the company’s implication in the adverse impact, including through financial or non-financial compensation provided by the company to a person or persons affected by the actual adverse impact and, where applicable, reimbursement of the costs incurred by public authorities for any necessary remedial measures. Member States should ensure that stakeholders affected by an adverse impact are not required to seek remediation prior to filing claims in court.
Member States should ensure that, where the company fails to provide remediation in case it has caused or jointly caused the actual adverse impact, the competent supervisory authority has the power, on its own initiative or as a result of substantiated concerns communicated to it in accordance with this Directive, to order the company to provide appropriate remediation.
This is without prejudice in such a situation to the imposition of penalties for the infringement of provisions of national law adopted pursuant to this Directive and to civil liability being sought before a national court. Where the actual adverse impact is caused only by the company’s business partner, voluntary remediation may be provided by the company. The company may also use its ability to influence the business partner causing or jointly causing the adverse impact to enable remediation.
(59) Companies should provide the possibility for persons and organisations to submit complaints directly to them in case of legitimate concerns regarding actual or potential human rights and environmental adverse impacts.
Persons and organisations who could submit such complaints should include persons who are affected or have reasonable grounds to believe that they might be affected and the legitimate representatives of such persons on behalf of them, such as civil society organisations and human rights defenders; trade unions and other workers’ representatives representing individuals working in the chain of activities concerned; and civil society organisations active and experienced in the areas related to the environmental adverse impact that is the subject matter of the complaint.
Companies should establish a fair, publicly available, accessible, predictable and transparent procedure for dealing with those complaints and inform the relevant workers, trade unions and other workers’ representatives about such procedures. Companies should also establish an accessible mechanism for the submission of notifications by persons and organisations where they have information or concerns regarding actual or potential adverse impacts. In order to reduce the burden on companies, they should be able to participate in collaborative complaints procedures and notification mechanisms, such as those established jointly by companies, for example, by a group of companies, through industry associations, multi-stakeholder initiatives or global framework agreements.
The submission of a notification or complaint should not be a prerequisite or preclude the person submitting them from having access to the substantiated concerns procedure or to judicial or other non-judicial mechanisms, such as the OECD national contact points where they exist. The provisions on the complaints procedure and notification mechanism under this Directive should be such as to avoid that access to a company’s representatives leading to unreasonable solicitation.
In accordance with international standards, persons submitting complaints, where they do not submit them anonymously, should be entitled to request from the company timely and appropriate follow-up and to meet with the company’s representatives at an appropriate level to discuss actual or potential severe adverse impacts that are the subject matter of the complaint and potential remediation, to be provided with the reasoning as to why a complaint has been considered founded or unfounded and, where considered founded, to be provided with information on the steps and actions taken or to be taken by the company.
Companies should also take reasonably available measures to prevent any form of retaliation by ensuring the confidentiality of the identity of the person or organisation submitting the complaint or notification, in accordance with national law. The terms ‘fair, publicly available, accessible, predictable and transparent’ should be understood in line with principle 31 of the UN Guiding Principles requiring procedures to be legitimate, accessible, predictable, equitable, transparent, rights-compatible and a source of continuous learning, as also referred to in the UN Committee on the Rights of the Child General Comment No 16.
Workers and their representatives should also be properly protected, and any non-judicial remediation efforts should be without prejudice to encouraging collective bargaining and recognition of trade unions, and should by no means undermine the role of legitimate trade unions or workers’ representatives in addressing labour-related disputes. Companies should ensure accessibility of the notification mechanisms and complaint procedures for stakeholders, taking due account of relevant barriers.
(60) Due to a broader list of persons or organisations being entitled to submit a complaint and a broader scope of subject-matter of complaints, the complaints procedure under this Directive should be legally understood as a mechanism that is separate from the internal reporting procedure set up by companies in accordance with Directive (EU) 2019/1937 of the European Parliament and of the Council.
If the breach of Union or national law included in the material scope of that Directive can be considered to be an adverse impact and the reporting person is a company employee that is directly affected by the adverse impact, then that person could use both procedures: the complaints mechanism in accordance with this Directive and an internal reporting procedure set out in accordance with Directive (EU) 2019/1937. Nevertheless, if one of the conditions above is not met, then the person should be able to proceed only via one of the procedures.
Note: This is the final text of the Corporate Sustainability Due Diligence Directive (CSDDD), published in the Official Journal of the European Union in July 2024.