The EU’s (New) Corporate Sustainability Due Diligence Directive (CSDDD)

On 15 March 2024, consensus for a Proposal for a Corporate Sustainability Due Diligence Directive (CSDDD) was reached by the European Council. This means that now further steps can be taken for the formal adoption, i.e. the approval by the European Parliament, and the execution by the European Commission.

The CSDDD imposes obligations on large companies with respect to actual and potential adverse impacts on the environment and human rights for their business chain of activities covering the upstream business partners of a company and partially its downstream activities, such as distribution or recycling.

The CSDDD also introduces penalties and civil liability for infringement of those obligations; it requires companies to adopt a plan ensuring that their business model and strategy are compatible with the Paris Agreement on climate change.

In essence, this new version of the CSDDD was subject to intense negotiations, since the CSDDD determines the scope of companies that are bound by it.

The Result
Now, fewer companies than initially anticipated will fall under the scope of CSDDD. Despite this change, companies that are no longer directly impacted by the CSDDD, may be indirectly affected through their (potentially) affected supply chain partners. Accordingly, supply chain due diligence is expected to gain importance.

New Scope
The CSDDD lays down rules on obligations for companies regarding actual and potential adverse impacts on human rights and on the environment, concerning their own operations, the operations of their subsidiaries, and the value chain operations carried out by entities with whom a company has an established business relationship (e.g., supply chain partners).

When compared to earlier drafts of the CSDDD, the general thresholds for EU companies have been increased in the final version, in order to reduce the number of EU and non-EU companies that would fall under the scope of the CSDDD. While in the former version, companies with 500 employees or more would have fallen under the scope of the CSDDD, it was now changed to 1,000 employees. A similar adjustment was made to the turnover threshold, which was changed from EUR 150 million to EUR 450 million.

Non-EU companies with a turnover of EUR 450 million and more generated in the EU market, also fall under CSDDD’s scope. Moreover, the European Commission will publish a list of non-EU companies that fall under the scope of the CSDDD as well.

If the CSDDD will be adopted by the European Parliament later this year (expected May/June 2024), EU member states will have to implement the CSDDD within the next two years.

The applicability of CSDDD for companies that will have to comply will presumably be staged as follows:

• 3-years as of entry to force (2027): companies with more than 5,000 employees and EUR 1,500 million turnover;
• 4-years as of entry to force (2028): companies with more than 3,000 employees and EUR 900 million turnover;
• 5-years as of entry to force (2029): companies with more than 1,000 employees and EUR 450 million turnover.

“High-Risk” Sectors
In addition, the high-risk sectors approach has been deleted. In accordance with the former version, companies from certain “high-risk” sectors would have fallen under the scope of the CSDDD, given a global net turnover of more than EUR 40 million, with at least EUR 20 million generated in these “high-risk” sectors and with more than 250 employees. However, the review clause now refers to the possibility to later address the high-risk sectors approach, if necessary.

Supply Chain
In a previous version, companies within the scope of the CSDDD were required to end or prevent partnerships with companies that actually or potentially have adverse impacts on human rights or on the environment.

Now, the termination is classified as a last resort solution, subject to assessment upon its preventive or corrective action plan. Accordingly, companies now can weigh out whether the termination would result in more serious adverse impacts. This assessment will be required to be in line with Articles 4, 5, and 6 of the CSDDD.

CSDDD and its Alignment with International Agreements
CSDDD should also be seen in the context of the UN Guiding Principles on Business and Human Rights (UNGP) and the OECD Guidelines for Multinational Enterprises. Both have global applicability and adoption, demonstrating that stakeholders are increasingly demanding companies to put in place credible measures to address supply chain risks. 

Article 15 of the CSDDD obliges companies within the scope of the CSDDD to adopt a transition plan in line with Article 19a CSRD (Corporate Sustainability Reporting Directive), in order to restrict global warming to a maximum of 1.5°C through best efforts in accordance with the Paris Agreement.

Already Existing Legislation
Some member states already have laws in place that address risk areas that fall under CSDDD. An example would be Dutch law, which already provides legislation for class actions and collective redress (Wet afwikkeling massaschade in collectieve actie ‒ WAMCA).

Moreover, the EU previously issued relevant actions and legislation that require forms of due diligence. However, the purpose of CSDDD is to harmonise due diligence laws to ensure that the EU operates as a single market.

In compliance with Article 8d of the CSDDD, EU member states will need to guarantee that companies within the scope of the CSDDD take appropriate measures to engage with stakeholders as part of the CSDDD due diligence process.

The final text of the CSDDD can be found here:
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