Corporate Sustainability Due Diligence Directive comes into force

On 25 July 2024 the European Union's Directive on corporate sustainability due diligence (CSDD Directive) (Directive (EU) 2024/1760) came into force.

The Directive creates a corporate due diligence duty, that seeks to foster sustainable and responsible corporate behaviour in companies’ operations and across their global value chains. It establishes new rules to ensure that in scope companies identify and address adverse human rights and environmental impacts of their actions both inside and outside Europe.

Background

First proposed back in February 2022, the CSDD Directive was given approval in May this year and published in the Official Journal of the European Union in July. Whilst it comes into force officially on 25 July, Member States have two years to implement its provisions into national law, meaning business won't have legal obligations until July 2027 at the earliest.

The CSDD Directive is a highly ambitious piece of law, requiring companies both inside and outside of the EU to take proactive measures to respect human rights and mitigate environmental impacts within their operations and supply chains.

There are Member States who have national legislation on due diligence already, but these tend to be sector-specific or address a single aspect such as workplace slavery or child labour. This Directive brings a more comprehensive and mandatory approach to sustainability reporting.

Compared to the version of the CSDD Directive initially agreed in December 2023, the final version as published is somewhat scaled back in its requirements - now applying to fewer companies and with a delayed phase-in application. However the Directive still sets out important rules that will have an impact on many multinational companies that operate within the EU. To help you navigate the new CSDD Directive, this In Focus will give you an overview of its key points, including:

• obligations;
• climate change transition plan;
• scope;
• enforcement;
• implementation timetable; and
• benefits of the CSDD rules.

Obligations

The CSDD Directive establishes a corporate due diligence obligation that requires in-scope companies to ensure that human rights and environmental obligations are respected along their chain of activities.

Where a violation of these obligations is identified, companies must take the appropriate measures to prevent, mitigate, bring to an end or minimise the adverse impacts arising from their own operations, those of their subsidiaries and those of their business partners in their chain of activities.

Companies must conduct risk-based human rights and environmental due diligence by:

• integrating due diligence into their policies and risk management systems;
• identifying and assessing actual or potential adverse impacts and, where necessary, prioritising actual and potential adverse impacts;
• preventing and mitigating potential adverse impacts, and bringing actual adverse impacts to an end and minimising their extent;
• providing remediation for actual adverse impacts;
• carrying out meaningful engagement with stakeholders;
• establishing and maintaining a notification mechanism and a complaints procedure;
• monitoring the effectiveness of their due diligence policy and measures; and
• publicly communicating on due diligence.

'Adverse impacts' include adverse:

• environmental impacts - for example impacts resulting from pollution, deforestation, excessive water consumption, damage to ecosystem; and
• human rights impacts - examples include child labour, slavery, and labour exploitation.

'Chain of activities' includes a company's:

• upstream value chain - including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of products and the development of the product or the service; and
• downstream value chain - the distribution, transport and storage of a product of that company, where the business partners carry out those activities for the company or on behalf of the company, and excluding the distribution, transport and storage of a product that is subject to export controls.

Climate change transition plan

Under the new CSDD Directive, companies are required to adopt and implement a transition plan for climate change mitigation.

A transition plan for climate change mitigation must contain:

• time-bound targets related to climate change for 2030 and in five-year steps up to 2050 based on conclusive scientific evidence and, where appropriate, absolute emission reduction targets for greenhouse gas for scope 1, scope 2 and scope 3 greenhouse gas emissions for each significant category;
• a description of decarbonisation levers identified and key actions planned to reach the targets referred to above, including, where appropriate, changes in the product and service portfolio of the company and the adoption of new technologies;
• an explanation and quantification of the investments and funding supporting the implementation of the transition plan for climate change mitigation; and
• a description of the role of the administrative, management and supervisory bodies with regard to the transition plan for climate change mitigation.

Those companies who have reported a transition plan for climate change mitigation under Directive 2013/34/EU, on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, are automatically deemed to have complied with their obligation to adopt a climate plan.

The European Commission will be publishing guidelines to assist companies with their climate change transition plan.

Scope

The CSDD Directive defines three main groups of companies as falling in scope for the purposes of the CSDD rules - this includes both EU companies and some non-EU companies. The scope is as follows:

EU companies	Non-EU companies
Group 1 'Very large companies', that in their last financial year had more than: 1,000 employees on average; and €450 million of net worldwide turnover.	Group 1a 'Very large companies', that in their last financial year had more than €450 million of net turnover in the EU.
Group 2 Ultimate parents of 'very large' groups This includes companies that are the ultimate parent of a group that when consolidated, reach the thresholds for group 1, based on the last financial year.	Group 2a Ultimate parents of 'very large' groups This includes companies that are the ultimate parent of a group that when consolidated, reach the financial thresholds for group 1a, based on the last financial year.
Group 3 Companies that entered into, or are the ultimate parent of a group that entered into, a franchising or licensing agreement in the EU and in the last financial year: had royalties of more than €22.5 million; the company generated individually, or is the ultimate parent company of a group that on a consolidated based, generated a worldwide net turnover of more than €80,000,000	Group 3a Companies that entered into, or are the ultimate parent of a group that entered into, a franchising or licensing agreement in the EU and in the last financial year: had royalties of more than €22.5 million; the company generated individually, or is the ultimate parent company of a group that on a consolidated based, generated a net turnover of more than €80,000,000 in the EU.

The EU estimate around 6,000 EU companies and partnerships will fall within scope of the CSDD rules, and around 900 non-EU companies.

It is worth remembering that the obligations set out in the CSDD aren't limited to the in-scope company's own operations. They also include any subsidiaries and extend through a companies chain of activities to upstream and downstream businesses in their value chain that will be indirectly affected by the new rules.

Micro-companies and small and medium-sized enterprises (SMEs) are not directly in-scope but there are supporting measures within the CSDD Directive relating to these companies who could be indirectly affected through the value chains they operate within. 

In terms of when in-scope companies will have to legally comply, this will be thorough a phased in approach - see implementation timescale.

Enforcement

Member States must designate an authority in their state to supervise and enforce the new CSDD rules as well as providing for penalties for non-compliance.

Penalties will include:

• injunction orders;
• fines - the maximum sanction must be at least 5% of the company's global net turnover, but Member States can choose to set their maximum penalties even higher; and
• 'naming and shaming' measures - any fines issued will be published and publicly available for at least five years.

Where companies have violated the CSDD rules, either intentionally or negligently, and that violation caused damage to a person, then those victims will be entitled to compensation for damages resulting from the companies failure to carry out due diligence.

Implementation timescale

Member states have two years to implement the CSDD Directive into national law. The requirements will apply over a three-year phased in period, depending on the size and turnover of the company. The timescale for compliance for EU companies is as follows:

• July 2027, for companies with more than 5,000 employees and €1,500 million global net turnover;
• July 2028, for companies with more than 3,000 employees and €900 million global net turnover;
• July 2029 for all other in-scope companies, so this means those with more than 1,000 employees and €450 million global net turnover.

and for non-EU companies is as follows:

• July 2027, for companies with more than €1,500 million net turnover in the EU;
• July 2028, for companies with more than €900 million net turnover in the EU;
• July 2029 for all other in-scope companies, so this means those with more than €450 million net turnover in the EU.

The requirement for average employees only applies to EU companies; for non-EU companies compliance is based on their net turnover in the EU alone.

The European Commission will be publishing guidelines in due course, in order to help companies undertake due diligence in line with this Directive.

Benefits of the CSDD rules

A range of stakeholders have been calling for mandatory due diligence rules for a number of years now. An EU public consultation found that 70% of businesses agreed that EU action on corporate sustainability due diligence is needed.

So what are the key benefits of these new rules?

For companies:

• the EU rules will provide a uniform legal framework and help to ensure a level playing field for companies across the EU Single Market;
• it will help foster international competitiveness, increase innovation and ensure legal certainty for companies addressing sustainability impacts;
• better risk management and increased resilience;
• increased customer trust and employee commitment;
• improved awareness of companies’ negative human rights and environmental impacts - less liability risks;
• increased attractiveness for talent, sustainability-oriented investors and public procurers;
• enable better access to finance.

For citizens:

• a healthier environment and better climate change migration;
• better protection for human rights, including labour rights;
• greater transparency to enable informed consumer choices;
• increased trust in businesses;
• better access to justice for victims.

For developing countries:

• better protection of human rights;
• better environmental protection;
• improved living conditions;
• sustainable investment, capacity building and support for value chain companies;
• improved sustainability practices;
• increase in up-take of international standards.

Of course there will be costs for business in implementing due diligence in line with the Directive. Businesses will have costs associated with:

• establishing and operating the due diligence process; and
• expenditure and investments to adapt a company’s own operations and value chains to comply with the due diligence obligation. 

However these costs are likely to be viewed as reasonable when the holistic widespread benefits brought by the CSDD rules for not only the business itself, but the public and global benefits, are considered.

For more information, see:

• Directive (EU) 2024/1760, on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859.