Embracing corporate responsibility, the newly formalized Corporate Sustainability Due Diligence Directive ("CSDDD") heralds a groundbreaking era. Our article delves into its historical backdrop, the spectrum of covered companies, the array of obligations imposed, the gradual phase-in, and the compelling benefits awaiting those who embrace CSDDD compliance.
After nearly a decade of campaigning and a challenging four-year EU legislative journey, the Member States finally green-lighted the Corporate Sustainability Due Diligence Directive ("CSDDD") on May 24th. The EU Council approval marks the official final step in the adoption process. Mandating responsible business practices, the CSDDD establishes a groundbreaking civil liability regime, holding companies legally liable for failing to uphold human rights and environmental standards throughout their operations and value chains. Once the President of the European Parliament and the President of the Council sign off on the directive, it will be published in the EU's Official Journal. The directive will then take effect twenty days after publication. The Member States are granted a two-year window to enact the necessary regulations and administrative structures to align with this directive.1
Historical Background
In the face of unpreventable environmental and human rights damage to the future of the world and the imperative to adopt sustainability as a remedy, on December 14, 2023, the European Parliament, Council, and Commission agreed on the CSDDD. Civil society organizations welcomed the agreement but criticized some shortcomings, such as the lack of oversight of financial activities.2
Once the final technical details were finalized, the groundwork was laid for the formal adoption of the directive. But in a last-minute move, Germany's junior coalition partner, the FDP, rejected the compromise. This blocked Germany's support for the CSDDD in the Council. At the February 28 meeting, the Member States did not endorse the CSDDD, with the positions of Italy and France also unclear. More than 130 organizations, including the Resource Centre, called on the Belgian EU presidency and the Member States to return to the negotiating table and secure a majority for the text agreed during the tripartite dialogue.
On March 15, 2024, the European Council reached a compromise on the content and scope of the CSDDD, which covers certain large companies in and outside the EU. The directive was adopted by a "qualified majority" with 15 countries representing 65 percent of the EU voting in favor. The approved version incorporated several concessions relative to the December 2023 agreement, notably reducing the number of companies it would cover, which was criticized by civil society organizations. Nevertheless, this revolutionary regulation was approved following protracted efforts.
Which Companies Are Covered by the CSDD?
The CSDDD will apply to companies exceeding specific employee and turnover thresholds, prioritizing high-impact sectors like textiles and mining. Compared to the version the Parliament agreed upon, the number of companies covered by the CSDDD was reduced by raising the thresholds to 1,000 employees3 (up from 500) and revenue greater than €450 million (up from €150 million). Specifically, the Directive will apply to the following companies (with financial services being temporarily excluded):
- EU Companies with more than 1,000 employees and a net global turnover of more than EUR 450 million.
- Non-EU companies with a net turnover of more than EUR 450 million generated in the EU.
While not directly subject to the CSDDD, small and medium-sized enterprises (SMEs) acting as subsidiaries or business partners (suppliers, contractors, or subcontractors) to covered companies will likely face indirect pressure to comply with human rights and environmental standards.
The CSDDD has undergone significant revisions since its approval by the Parliament in December. Many articles were amended before ratification. These changes include a phased implementation, with full compliance for all relevant companies delayed until five years after the directive's entry into force. In addition, product disposal activities were excluded from the scope of the law, and companies were no longer required to offer financial incentives to adopt climate transition plans.
Which Obligations Will the CSDDD Require Companies to Fulfill?
In-scope companies will be required to establish human rights and environmental due diligence ("HREDD") procedures in line with international standards such as the United Nations Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises, and the International Labor Organization Tripartite Declaration on Multinational Enterprises and Social Policy. The scope of HREDD is defined as the company's activities, the activities of subsidiaries, and the activities carried out by business partners in the "Chain of Operations".
As part of HREDD, companies assume substantial obligations by making management commitments regarding human rights and environmental responsibilities, and by incorporating them into their corporate policies. These obligations are as follows:
Risk Assessment: Identification and assessment of the potential negative impacts of activities on human rights and the environment.
Prevention and Mitigation: Taking proactive steps to prevent or minimize potential adverse impacts.
Termination and Minimization: Taking prompt and effective steps to end or minimize adverse impacts that have occurred.
Compensatory Remedies: Providing fair and effective remedies for human rights and environmental harm to those affected.
Stakeholder Engagement: Communicating openly and transparently with all stakeholders concerned with human rights and environmental responsibilities.
Reporting and Grievance Mechanism: Establishment of an effective mechanism for reporting and addressing human rights and environmental violations.
Monitoring and Evaluation: Establishment of a robust system to monitor and evaluate the effectiveness of measures taken.
Lastly, under the HREDD, audits and sanctions are also outlined. EU Member States will establish competent authorities tasked with overseeing and sanctioning companies to ensure compliance with their human rights and environmental obligations. These authorities will have the power to conduct investigations, issue legal orders to correct or stop violations and impose fines of up to 5% of net global turnover on non-compliant companies. Companies that willfully or negligently fail to fulfill their obligations may also be subject to civil liability in connection with the resulting damages.
Gradual Phase-in
A staggered approach is envisioned for companies to comply with the CSDDD, beginning from the effective date:
Group 1: The CSDDD will apply in three years to companies with more than 5000 employees and an annual turnover exceeding EUR 1.5 billion;
Group 2: The CSDDD will apply in four years to companies with 3000 employees and an annual turnover exceeding EUR 900 million;
Group 3: The CSDDD will apply in five years to companies with 1000 employees and an annual turnover exceeding EUR 450 million.
Company Benefits from the CSDDD Compliance
While challenges and uncertainties have increased due to the failure to fully endorse the CSDDD, largely attributed to the blockage by the Member States, proactively engaging with the CSDDD's requirements and embracing sustainable practices will ultimately benefit companies by:
Reducing Legal Risks: Implementing robust due diligence minimizes the likelihood of facing lawsuits and associated costs.
Enhancing Investor Confidence: Demonstrating commitment to sustainability attracts ethical investors and improves stakeholder relations.
Strengthening Brand Reputation: Taking tangible steps towards positive impact builds brand trust and consumer loyalty.
Driving Innovation: Embracing sustainable practices often leads to innovation and efficiency gains, boosting competitiveness.
Conclusion
Before the CSDDD, international instruments and soft law initiatives nudged companies toward responsible conduct. However, these lacked teeth, often failing to translate into tangible action. The CSDDD marks a watershed moment in corporate accountability, introducing legally binding due diligence obligations for large companies within the EU market. Its civil liability regime compels companies to prioritize responsible business conduct and uphold human rights and environmental standards across their operations.
By actively embracing the CSDDD and its civil liability regime, companies can navigate this new era of accountability, contributing to a more sustainable future for themselves and broader society.
With thanks to Dilberay Yıldırım for her assistance on this article.
Footnotes
1. (EU Council press release: Corporate Sustainability Due Diligence Directive formally adopted, 2024)
2. (EU Corporate Sustainability Due Diligence Directive finally & formally adopted, 2024)
3. (McGowan, 2024)
Resources
EU Corporate Sustainability Due Diligence Directive finally & formally adopted. (2024, May 24). Retrieved from Business & Human Rights Resourse Centre: https://www.business-humanrights.org/en/latest-news/eu-csddd-political-agreement/
EU Council press release: Corporate Sustainability Due Diligence Directive formally adopted. (2024, May 24). Retrieved from Business & Humanrights Resource Centre: https://www.business-humanrights.org/en/latest-news/eu-council-has-formally-adopted-the-corporate-sustainability-due-diligence-directive/
McGowan, J. (2024, March 18). EU Releases Full Text Of Corporate Sustainability Due Diligence Law Ahead Of Parliament Vote. Retrieved from Forbes: https://www.forbes.com/sites/jonmcgowan/2024/03/18/eu-releases-full-text-of-corporate-sustainability-disclosure-law-ahead-of-parliament-vote/?sh=10c8898b3520
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