DD is increasingly becoming more ESG

On 1 June, the European Parliament took another step in the legislative process of the Corporate Sustainability Due Diligence (CSDD) Directive. As a result, this directive may be agreed upon as early as next year. European member states will have 2 years from then on to introduce appropriate legislation. In 2.5 years, this could already be European-wide law.

The goal of the CSDD legislation is to identify, prevent, reduce and end (potential) negative impacts of business activities on human rights and the environment. The legislation will apply to large companies operating within the EU. These are companies with more than 500 employees and EUR 150 million global turnover or with more than 250 employees and EUR 40 million turnover if high impact sectors are involved. Briefly, these are (i) textiles, leather, clothing and footwear, (ii) agriculture, forestry, fisheries, food products and beverages and (iii) extraction of and trade in mineral resources and production of metal commodities.

Article 22 of the CSDD Directive states that member states must provide for civil liability of companies for damage if they fail to comply with their obligation to prevent, reduce and end (potentially) detrimental human rights and environmental impacts, and damage result. This liability applies not only to a company's own acts or omissions, but also to those of subsidiaries and established business partners in the value chain. This liability therefore goes beyond its own liability. The CSDD Directive requires parent companies to engage with potential detrimental human rights and environmental impacts of subsidiaries and business partners. If a parent company fails to do so or does not do so sufficiently, it will be liable for liability sooner than is currently the case.

Article 25 of the CSDD Directive also contains a social responsibility for directors to be introduced by member states. Directors must take sustainability into account when acting in the best interests of the company. This includes all Environmental, Social and Governance (ESG) factors. This social responsibility of directors seems to go beyond merely fulfilling the due diligence obligations of one's own company. However, this social responsibility only applies to directors of companies incorporated under the laws of an EU member state. So for now, directors of non-EU companies will get off with a fright.

In the years to come, compliance with this kind of ESG legislation will become increasingly more important for companies. M&A transactions will also (have to) pay more attention to this. This will start as early as the DD.

This article has been published recently in M&A Magazine.