EU Proposal for a Corporate Sustainability Due Diligence Directive
Governmental Agency: European Commission
Jurisdiction: European Union
Ref no: 2022/0051(COD)
Status: ADOPTED
The EU Corporate Sustainability Due Diligence Directive (CSDDD) proposal, released in February 2022, aims to foster sustainable and responsible corporate behavior and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules will ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe.
The benefits desired through this legislation include:
- For citizens, through the protection of human rights, improvements to environment, increased trust in business, improved transparency, and better access to justice;
- For companies, by increasing legislative harmonization leveling the playing field, creating consumer trust, improving transparency of environmental and social impacts and therefore better risk management, and improving access to finance; and
- For developing countries, increasing environmental and social protections in which EU businesses operate, and improving practices & standards.
The Directive would introduce a number of requirements for businesses:
1) A duty to deliver corporate due diligence, including requirements to identify, bring to and end, prevent, mitigate and account for human rights and environmental impacts in the company’s own operations, their subsidiaries and their value chains. These impacts would include areas such as pollution, biodiversity loss, child labor etc.
2) For certain large companies, implement plans to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement.
3) Duties for the Directors of obligated EU companies. These include requirements to set up, and oversee the implementation of, the due diligence processes, integrating due diligence into the corporate strategy, and taking into account the human rights, climate change and environmental consequences of their decisions.
The above requirements may result in a requirement to overhaul and extend existing due diligence practices to account for the necessary environmental and social areas to be targeted. This may result in additional costs (i.e. implementation, training, monitoring & reporting, mitigation etc.). This will naturally also impact those organizations part of business supply chain. Member States will also be impacted due to the administrative supervision. To avoid duplication, companies already obligated to follow the Corporate Sustainability Reporting Directive (CSRD) remain exempt from the climate transition plan.
On March 15, 2024, the European Council made last minute changes before endorsing the final text, after a provisional agreement on the text had already been reached with the Parliament. The deal further narrowed the definition of "chain of activities" that require due diligence by excluding:
- Downstream activities performed by indirect business partners (such that only activities performed directly “for the company or on behalf of the company” remain in-scope).
- Downstream activities at the product disposal stage (such as dismantling, recycling, composting, and landfilling).
The new deal also removed the high-impact sector approach—which would have expanded the scope to include companies that operate in industries with a high likelihood of facing human rights or environmental conflicts (including textiles and clothing), even if they didn't meet the employee or turnover requirements.
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Originally, the CSDDD impacted companies with 500 employees and a turnover of €150 million. Following the March 15 deal, the new due diligence rules will apply to the following businesses and sectors:
1) EU companies with 1,000+ employees and a turnover of €450 million (compared to 500 employees and a turnover of €150 million in the proposed agreement.)
2) Non-EU companies that generate a net turnover of €450 million inside the Union (compared to €150 million in the proposed agreement).
3) Franchises with a net worldwide turnover of €80 million (compared to €40 million in the proposed agreement) and €22.5 million in royalties (compared to €7.5 million in the proposed agreement).
The directive will also be phased in over a longer period:
1) Companies with 5,000 employees and €1,500 million turnover will be impacted in 3 years.
2) Companies with 3,000 employees and €900 million turnover will be impacted in 4 years.
3) Companies with 1,000 employees and €450 million turnover will be impacted in 5 years.
Since Member States would have 2 years to transpose the directive into national law following its adoption at the EU level, it would now likely be at least 7 years before the new rules take full effect.
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On July 25, 2024, the Directive entered into force.
Member States have until July 26, 2026 to transpose the Directive into national law and communicate the relevant texts to the Commission. A year later, the rules will begin to apply to the first group of companies, with full application by July 26, 2029.
