Author: Dr. Ezgi Uysal

1)    Introduction

This blog post is the second in a two-part series that examines the evolving EU regulatory landscape on corporate sustainability due diligence and its implications for the future of public procurement law.  Not only does it consider the recent regulatory simplification wave in the arena of corporate sustainability, but it also examines the relationship between the Corporate Sustainability Due Diligence Directive (CSDDD) and public procurement law. Building on the previous research on the challenges of incorporating corporate sustainability due diligence in public procurement,  this two-part series seeks to analyse the identified challenges and to share further reflections considering the Commission’s recent emphasis on European competitiveness and the anticipated revision of public procurement legislation.

In this context, the first post explored the formalisation of previously non-binding corporate sustainability standards, focusing on the scope of the newly adopted CSDDD, the impact of the Omnibus Simplification, and stakeholder responses to the Simplification Agenda. This second post explores the interplay between corporate sustainability due diligence and public procurement, how public procurement is regulated under the CSDDD, the challenges of incorporating corporate sustainability due diligence under the current public procurement legislation, and opportunities offered to address these challenges through the review of the public procurement legislation and renegotiations of CSDDD.

2)    CSDDD and Public Procurement

Similar to the concept of human rights and environmental due diligence (HREDD), the interplay between due diligence and public procurement also originates from soft law. As noted in the first part of the series, while the second pillar of the United Nations Guiding Principles (UNGPs) is “the corporate responsibility to respect human rights”, the first pillar concerns “the state duty to protect human rights”. This pillar embodies States’ existing obligations to protect against human rights abuses within their territory and/or jurisdiction by third parties, including business enterprises. In the context of the State-Business Nexus, Guiding Principle 6 explicitly provides that “States should promote respect for human rights by business enterprises with which they conduct commercial transaction.” Similarly, the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct as updated in 2023, acknowledges the role of governments on responsible business conduct.¹

More recently, though, the linkage between HREDD and public procurement has been also subject to legislation, such as the potential of exclusion from future procurements in case of infringements of the Act on Corporate Due Diligence Obligations in Supply Chains in Germany or the Public Procurement Act requiring certain contracting authorities to have routines to promote respect for human rights in Norway. Additionally, good practices are being shared on HREDD and public procurement, both at the national and the European level, with respect to Directive 2014/24 (Public Procurement Directive) under the umbrella of Sustainable Public Procurement (SPP).²

In the legislative journey of the CSDDD, starting with the European Parliament’s Recommendations in 2021, which incorporated a public procurement provision similar to that of the German Act on Corporate Due Diligence Obligations in Supply Chains, public procurement has been incorporated in different ways in different versions of the CSDDD. While the Commission Proposal from 2022 did not include an explicit provision on public procurement, the final text adopted in 2024 contains a provision titled “Public support, public procurement and public concessions” with Article 31. This provision, a provision that remained unchanged with the Proposal for a Directive amending CSRD and CSDDD, provides that

Member States shall ensure that compliance with the obligations resulting from the provisions of national law transposing this Directive, or their voluntary implementation, qualifies as an environmental or social aspect that contracting authorities may, in accordance with Directive[…] 2014/24/EU […] take into account as part of the award criteria for public […] contracts, and as an environmental or social condition that contracting authorities may, in accordance with [this] Directive[…], lay down in relation to the performance of public […] contracts.

In addition to the potential incorporation of due diligence obligations as award criteria or contract performance conditions, Recital 92 of the CSDDD provides that

[…] Contracting authorities […] may exclude or may be required by Member States to exclude from participation in a procurement procedure, […] where applicable, any economic operator, where they can demonstrate by any appropriate means a violation of applicable obligations in the fields of environmental, social and labour law, including those stemming from certain international agreements ratified by all Member States and listed in [this] Directive[…], or that the economic operator is guilty of grave professional misconduct, which renders its integrity questionable. […]

Though this Recital does not (more importantly, cannot) introduce “a specific obligation to contracting authorities […] this explicit mention confirms that the CSDDD’s due diligence obligations, as well as their national implementation, fall under ‘applicable obligations in the fields of environmental, social and labour law established by Union law, national law’ under Article 18(2) of the Public Procurement Directive”.³ In this context, another crucial point highlighted by Recital 92 was the potential revision of the public procurement legislation, which stated that

To ensure consistency of Union legislation and support implementation, the Commission should consider whether it is relevant to update […] [this]  directive[…], in particular with regard to the requirements and measures Member States are to adopt to ensure compliance with the sustainability and due diligence obligations throughout procurement […] processes.

While at the negotiations of CSDDD, the revision of the public procurement legislation was provided as a potential, with the new Political Guidelines, von der Leyen has undertaken to propose a revision of the public procurement legislation.⁴ As it currently stands, the engine for the revision of the public procurement legislation has officially started.⁵  The evaluation of the existing legal framework for the revision of the public procurement legislation offers a significant opportunity to critically assess the interplay between CSDDD and public procurement legislation and to ensure compliance with due diligence obligations in public procurement as prescribed in Recital 92 of the CSDDD.

3)    Challenges of Incorporating Corporate Sustainability Due Diligence in Public Procurement under the Current Public Procurement Legislation

To begin with, Article 31 of CSDDD, providing the incorporation of corporate sustainability due diligence under award criteria and performance conditions in public procurement, is not straightforward as it regulates both the compliance with obligations arising from the CSDDD for businesses that fall under its scope (in-scope businesses), as well as the voluntary implementation of due diligence obligations for businesses that do not fall under the scope of the CSDDD (out-of-scope businesses).

Rationally, corporate sustainability due diligence for in-scope businesses cannot be used as award criteria pursuant to Article 67 of the Public Procurement Directive, as compliance with the applicable legislation “cannot be weighted as opposed to price or cost”.⁶ Accordingly, assessing corporate sustainability due diligence under the award criteria is only compatible when used with reference to out-of-scope businesses that voluntarily carry out due diligence. In principle, corporate sustainability due diligence can be required as a performance condition pursuant to Article 70 of the Public Procurement Directive, both for in-scope businesses and out-of-scope businesses who voluntarily undertake corporate sustainability due diligence. Nevertheless, in both cases, for procedures where both types of businesses may have an interest in participating in a procurement procedure, how out-of-scope businesses will not be prejudiced as opposed to in-scope businesses who are bound to carry out corporate sustainability due diligence remains a dilemma.⁷

When assessing the interoperability of CSDDD and the current public procurement legislation, the biggest challenge comes from the requirement of the link to the subject matter applicable both to award criteria and contract performance conditions under the Public Procurement Directive. This concept, first introduced with the Commission soft and later endorsed and further developed by the Court of Justice of the EU (CJEU), requires a consideration to relate to any part of the life-cycle of what is being purchased without necessarily requiring such elements to constitute the material substance.⁸ As such, this understanding of the requirement focuses on the individual supplies/services purchased by the public buyer, rather than the type of supplies/services. In this context, while requiring the specific purchase to adhere to certain standards concerning its life-cycle is considered linked to the subject matter, requirements concerning general corporate policies are prohibited, as noted in Recital 97 of the Public Procurement Directive. Nevertheless, when it comes to corporate sustainability due diligence, this differentiation between requirements concerning individual purchase and corporate policies is challenging, as the corporate sustainability due diligence is, as the name indicates, a corporate concept.

In this context, as discussed in 2023, the first step of corporate sustainability due diligence -integrating due diligence into policies- as provided with the CSDDD, fundamentally contradicts the Public Procurement Directive’s ban on referring to corporate policies.⁹ Additionally, the subsequent steps of corporate sustainability due diligence – identifying, assessing, ceasing, preventing and mitigating adverse impacts- challenges the requirement of link to the subject matter as the former requires prioritisation where there is risk, while latter limits due diligence to the subject matter of the purchase which in turn precludes the contractor from prioritising other types of supplies/services and suppliers that might have a higher risk of abuse than the subject matter.¹⁰ Lastly, specifically for public supply contracts concerning readily available products, requiring contractors to conduct due diligence during the contract term pertains to current conditions in their value chain, not necessarily the conditions of the specific goods supplied to the public buyer, which again call compliance with requirement of link to the subject matter into question.¹¹

4)    The Way Forward: CSDDD and the Review of Public Procurement Legislation

As recently noted in the European Commission’s Factual Summary report on the public consultation on Evaluation of the Public Procurement Directives, EU legislation with public procurement relevance is not aligned with the Public Procurement Directive. For the incorporation of corporate sustainability due diligence in public procurement, the above-mentioned challenges concerning the requirement of the link to the subject matter should be taken into consideration in the revision of public procurement legislation, as well as the renegotiations concerning the CSDDD.

In the revision of the public procurement legislation, the obvious option is either eliminating the requirement of the link to the subject matter or adjusting it while abolishing the ban on referring to corporate policies.¹² If the requirement of the link to the subject matter is to remain, to an extent, technological developments, such as QR codes as a data carrier for digital product passports, may be used to facilitate linked-to-subject-matter due diligence.¹³ In this respect, allowing “European preference for strategic sectors” as noted by the Commission in the New Industrial Deal and reinforcing “domestic supply chains” as indicated in the Commission’s Competitiveness Compass -as options in the upcoming public procurement legislation- may simplify linked-to-subject-matter-due-diligence by promoting traceability in upstream value chains.

Though the Proposal for a Directive amending CSRD and CSRDDD does not mention public procurement, Article 31 of the CSDDD on public procurement may also be altered to align it with public procurement legislation and the current understanding of the requirement of the link to the subject matter. In this scenario, the straightforward solution would be the introduction of due diligence obligations on the public buyers under the CSDDD, which will de facto diminish the requirement of the link to the subject matter specifically for corporate sustainability due diligence. However, considering the deregulation and simplification trend in sustainability legislation, such a development appears unlikely.

A further suggestion could be the incorporation of corporate sustainability due diligence in public procurement as selection criteria rather than award criteria and performance conditions, as it is currently regulated under Article 31 of the CSDDD. Since under Article 58 of the Public Procurement Directive, selection criteria are not required to be linked to the subject matter of the contract (but be related and proportionate to the subject matter), the challenges arising from the requirement of the link to the subject matter would be eradicated. In such a case, a selection criterion on corporate sustainability due diligence would resemble the existing selection criteria under Article 58, assessing technical abilities such as environmental management systems or supply chain management and tracking systems.

While the CSDDD marks a pivotal shift, the proposed changes to the CSDDD, as investigated in Part 1, leave a much diluted concept of corporate sustainability due diligence. Though the public procurement provision in the CSDDD remains untouched so far, the interplay between corporate sustainability due diligence and public procurement is far from clear. As the European Commission launched a simplification wave in the name of competitiveness, it remains to be seen how the upcoming negotiations will unfold and what shape the CSDDD and the public procurement legislation will ultimately take.

References

1. See OECD, Responsible Business Due Diligence and Public Procurement Implications of new regulation (OECD Business and Finance Policy Papers, No. 71) 13.
2. For some examples, see Laura Treviño-Lozano and Ezgi Uysal, ‘Bridging the Gap between Corporate Sustainability Due Diligence and EU Public Procurement’ (2023) 30 Maastricht Journal of European and Comparative Law 554, 562.
3. CSDDD: Bridging due diligence and public procurement, by Ezgi Uysal and Laura Treviño-Lozano https://realaw.blog/2024/06/14/csddd-bridging-due-diligence-and-public-procurement-by-ezgi-uysal-and-laura-trevino-lozano/.
4. Political Guidelines for the Next European Commission 2024-2029’ https://commission.europa.eu/document/download/e6cd4328-673c-4e7a-8683-f63ffb2cf648_en?filename=Political%20Guidelines%202024-2029_EN.pdf.
5. Public procurement directives – evaluation https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/14427-Public-procurement-directives-evaluation_en.
6. CSDDD: Bridging due diligence and public procurement, by Ezgi Uysal and Laura Treviño-Lozano (n 3).
7. İbid.
8. For the analysis of the scope of the requirement, see Ezgi Uysal, the Concept of Being Linked to the Subject Matter (forthcoming).
9. Treviño-Lozano and Uysal (n 2).
10. ibid.
11. ibid.
12. Claire Methven O’Brien CM and Roberto Caranta, Due Diligence in EU Institutions’ Own-Account Procurement: Rules and Practices, Study requested by the CONT Committee, Directorate-General for Internal Policies, PE 738.335 (January 2024).
13. On digital product passports, see-Christin Mittwoch, ‘The Digital Product Passport of the Ecodesign Regulation – Passport to a Successful Twin Transformation in Product Law?’ (2024) 45 Business Law Review 62. On the use of digital product passports in public procurement, see Abraham Zhang and Stefan Seuring, ‘Digital Product Passport for Sustainable and Circular Supply Chain Management: A Structured Review of Use Cases’ (2024) International Journal of Logistics Research and Applications 1, 14.