Corporate Sustainability Due Diligence Directive (CSDDD): A New Era

1. An Overview

In this era of globalisation, where corporate sustainability is a common concern, the European Council approved the Corporate Sustainability Due Diligence Directive (CSDDD). Specifically, on May 24 of 2024, after a 4-month period of negotiations regarding its enforcement, the European Council gave its final approval of the CSDDD. But what exactly does the CSDDD entail?

The CSDDD aims to promote corporate sustainability and ensure that companies operate responsibly, respecting human, social, and environmental rights in line with ESG principles. It also establishes liability for EU and non-EU companies for violation of those rights though their business operation and those of their business partners in the chains of activities of those companies.

The "chain of activities" includes upstream business partners involved in designing, extracting, sourcing, producing, transporting, storing of raw materials, products or part of products. It also covers downstream business partners responsible for distributing, transporting and storing products for or on behalf of the company. Since the downstream impacts of services are entirely excluded, regulated financial undertakings are only subject to due diligence obligations for the upstream part of their chain of activities. However, the CSDDD envisions the possible introduction of sustainability due diligence requirements for the financial services industry as early as 2026.

Subsequently, an analysis of the CSDDD will be conducted to provide companies with a comprehensive understanding of their new obligations.

2. Climate Transition Plan

According to the CSDDD, all affected companies are required to adopt a climate transition plan in alignment with the Paris Agreement. Specifically, each company's business plan, should contribute to achieving the EU's strategy plans, such as, limiting global warming to 1.5 degrees Celsius, and reach climate net zero greenhouse gas emissions by 2050, including the targets set for 2030.

3. Companies that will be affected

Originally, the CSDDD was set to affect EU companies with 500 employees and a global net turnover of €150 million. However, in the final draft, these thresholds increased to 1,000 employees and a global net turnover of €450 million. This change excludes small and medium companies (SMEs) from the directive's implementation and any penalties. As a result, only around 30% of the originally targeted companies are now impacted. Nevertheless, it is worth noting that these SMEs may still be indirectly affected if they are subsidiaries and or part of the supply chain of larger companies. Non-EU companies with a global net turnover exceeding €450 million within the EU are also subject to the CSDDD.

Furthermore, companies that have entered into franchising or licensing agreements, have a global net turnover of at least €80 million, and royalties exceeding €22.5 million, will also be affected by the CSDDD, provided that they meet the other specified CSDDD requirements.

Additionally, the CSDDD, removes the high-risk sector approach from lower thresholds. This means, that high-risk companies with a global net turnover of more than €40 million, at least €20 million comes from high-risk sectors, and more than 250 employees, are no longer automatically subject to the directive. However, there is a possibility of reintroducing the high-risk sector approach into the directive at a later stage.

4. Implementation of the CSDDD in companies

The due diligence process outlined in the CSDDD follows the six steps defined by the Guidance for Responsible Business Conduct. These steps ensure companies identify and address adverse human rights and environmental impacts. That process includes the following steps: (1) integrating due diligence into policies and management systems; (2) identifying and assessing adverse human rights and environmental impacts; (3) preventing, ceasing or minimising actual and potential adverse human rights and environmental impacts; (4)monitoring and assessing the effectiveness of measures; (5) communicating and (6) providing remediation.

To enhance understanding, we will provide a concise review of these due diligence steps:

• Step 1: Develop a due diligence policy with employee input outlining the company's long-term approach. This policy should include a code of conduct, address business partners where relevant, describe integration into policies, and ensure a risk-based approach.
• Step 2: To comprehensively identify and assess adverse impacts, companies should use both quantitative and qualitative data, including available disaggregated data and public reports. Additionally, they should also map their operations, subsidiaries and business partners to pinpoint areas where adverse impacts are most likely and severe. Based on this mapping, companies should conduct in-depth assessments in these high-risk areas.
• Step 3: Companies should take the relevant measures to address adverse impacts by creating corrective action plans and obtaining compliance assurances from business partners. These assurances should be verified and extend through their supply chains. Companies should also invest financially or through non-financial means to in minimise impacts and collaborate with others in compliance with EU Law.
• Step 4: Companies should periodically assess their operations, subsidiaries and business partners to ensure effective identification and mitigation of adverse impacts. These assessments should be conducted at least annually and after significant changes.
• Step 5: To comply with due diligence communication obligations, companies should publish an annual statement on their website in an official EU language, within 12 months after the financial year, unless covered by Directive 2013/34/EU's sustainability reporting requirements.
• Step 6: If a company causes or jointly causes an adverse impact, it is required to provide remediation. If the impact is caused solely by a business partner, the company may voluntarily provide remediation and use its influence to ensure the partner provides remediation.

5. Enforcement

The CSDDD will be enforced through 2 procedures, specifically through:

• Civil liability, where companies should be held liable for damages, resulting from their intentional or negligent failure to comply with the provisions of the CSDDD. This clause excludes any liability caused solely by the business partners of a company.
• Administrative supervision, where companies that do not follow the provisions of the CSDDD will face sanctions and penalties by the administrative authorities of the EU Member State, not exceeding 5% of their global turnover.

6. Next steps

The CSDDD will be implemented in phases, as outlined below:

• Companies with more than 5,000 employees and €1,500 million global net turnover will be affected in 2027.
• Companies with more than 3,000 employees and €900 million global net turnover will be affected in 2028.
• Companies with more than 1,000 employees and €450 million global net turnover will be affected in 2028.

7. Conclusion

As is reasonably understood, the CSDDD is a crucial step towards implementing sustainability and corporate responsibility in the activities of the companies. By adopting CSDDD, a fundamental change in the operation of the companies will occur, leading to a more sustainable economy and the better protection of human and environmental rights.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.