On 24 May 2024, the Council of the European Union approved the highly anticipated EU Corporate Sustainability Due Diligence Directive (CSDDD). This directive imposes a legal duty on certain companies to conduct human rights and environmental due diligence. As one of the most significant laws of its kind, CSDDD will standardize due diligence requirements across the EU and may serve as a model for similar legislation worldwide.

Background

Initially proposed by the European Commission in 2022, the directive underwent extensive negotiations before reaching a final compromise. The European Parliament and the EU Council reached a provisional agreement in late 2023, followed by further revisions during ‘trilogue’ discussions to address concerns from individual Member States. The Council approved the final text on 15 March 2024, with the European Parliament formally adopting it on 24 April 2024.

Scope of Application

CSDDD applies to both EU and non-EU companies, though the final version significantly raises the thresholds for inclusion.

Covered EU Companies:

1. Companies with over 1,000 employees and annual net worldwide turnover exceeding €450 million (including ultimate parent companies).
2. Companies with:
   • EU franchising or licensing agreements generating annual royalties above €22.5 million, and
   • Net worldwide turnover exceeding €80 million (including ultimate parent companies).

Covered Non-EU Companies:

1. Companies with net turnover of €450 million generated in the EU (including ultimate parent companies).
2. Companies with:
   • EU franchising or licensing agreements generating annual royalties above €22.5 million, and
   • Annual net turnover of over €80 million in the EU (including ultimate parent companies).

Key Obligations

CSDDD mandates that in-scope companies conduct risk-based due diligence to identify, assess, prevent, mitigate, and remedy human rights and environmental impacts within their operations and “chain of activities.”

Companies must:

• Develop due diligence policies and implement appropriate measures to address actual or potential risks.
• Take action, including preventive measures, corrective action plans, financial investments, contractual assurances from business partners, and targeted support for SMEs.
• Align their business strategies and operations, including purchasing, design, and distribution practices, with due diligence goals.
• Identify and address adverse impacts from direct and indirect business partners in their chain of activities.
• Prioritize addressing impacts based on severity and likelihood, following the UN Guiding Principles on Business and Human Rights (UNGPs).
• Engage affected stakeholders, establish complaints mechanisms, and monitor the effectiveness of due diligence measures.

Transparency & Reporting

• Companies must publish an annual statement on due diligence efforts, unless already covered under the EU Corporate Sustainability Reporting Directive (CSRD).
• By March 2027, the European Commission will adopt delegated acts specifying further disclosure requirements.

Climate Transition Plan

Companies must develop and update annually a climate transition plan, ensuring their business strategy aligns with the Paris Agreement goal of limiting global warming to 1.5°C. This plan must:

• Address exposure to coal, oil, and gas-related activities.
• Set time-bound targets for climate change action (for 2030 and in five-year steps until 2050).
• Include, where appropriate, absolute greenhouse gas emission reduction targets for Scope 1, Scope 2, and Scope 3 emissions.

Scope of Due Diligence – “Chain of Activities”

The final directive refines the definition of “chain of activities” (previously referred to as “value chain”):

• Upstream activities: Includes design, extraction, sourcing, manufacture, transport, and development of products/services by direct and indirect business partners.
• Downstream activities: Limited to distribution, transport, and storage of products for or on behalf of the company. The disposal of products and downstream services are excluded.

Enforcement & Penalties

Each EU Member State will designate supervisory authorities to ensure compliance. These authorities will:

• Request information and conduct investigations into suspected violations.
• Impose corrective measures, including orders to cease infringements, take remedial actions, and prevent future violations.
• Levy financial penalties, with maximum fines set at no less than 5% of a company’s net worldwide annual turnover.
• Implement interim measures if there is an imminent risk of severe and irreparable harm.

Authorities will consider mitigating factors, such as the company’s diligence efforts, investments, support for SMEs, and prioritization of severe risks, when determining penalties.

Implementation Timeline

CSDDD will be implemented in phases, with larger companies subject to compliance first:

• 2027 (disclosures for financial years from 1 January 2028):
  • EU companies with 5,000+ employees and €1.5 billion+ net worldwide turnover.
  • Non-EU companies with €1.5 billion+ net EU turnover.
• 2028 (disclosures for financial years from 1 January 2029):
  • EU companies with 3,000+ employees and €900 million+ net worldwide turnover.
  • Non-EU companies with €900 million+ net EU turnover.
• 2029 (disclosures for financial years from 1 January 2030, though this may be a drafting error):
  • All remaining in-scope companies, including:
    • EU companies with 1,000+ employees and €450 million+ net worldwide turnover.
    • Non-EU companies with €450 million+ net EU turnover.

Next Steps

Once published in the Official Journal of the European Union, Member States will have two years to transpose CSDDD into national law.

Implications for Businesses

CSDDD aims to harmonize corporate due diligence obligations across the EU, building on existing laws in France (Loi Vigilance) and Germany (Lieferkettensorgfaltspflichtengesetz). However, national transposition may lead to inconsistencies or stricter local requirements (“gold-plating”).

Companies operating in the EU should:

• Assess their supply chains and existing due diligence processes to ensure compliance.
• Strengthen human rights and environmental risk management policies.
• Prepare for enhanced disclosure obligations and climate transition planning.

By taking proactive steps, businesses can mitigate risks, enhance sustainability efforts, and ensure compliance ahead of CSDDD’s phased implementation.