Assessing The Impact: The EU's Corporate Sustainability Due Diligence Directive

On 24 May 2024, the Council of the EU has formally adopted the Corporate Sustainability Due Diligence Directive (CSDDD). The directive, which will impose mandatory human...
UK Corporate/Commercial Law
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On 24 May 2024, the Council of the EU has formally adopted the Corporate Sustainability Due Diligence Directive (CSDDD). The directive, which will impose mandatory human rights and environmental due diligence as well as transition plan requirements on companies in scope, has therefore likely cleared its last major hurdle.

This marks a big win for corporate responsibility. The process has been complex and lengthy: since its provisional agreement in December 2023, the scope of the CSDDD has undergone substantial revision (and watering down) to win the requisite approvals.

The CSDDD plays an important part in the EU's broader Green Deal initiative, alongside other Directives such as the Corporate Sustainability Reporting Directive (CSRD).

Who's in scope?

Although the scope has become narrower than originally envisioned (EU companies with no less than 1000 employees and a turnover of €450 million (Article 2(1)(a))), it is still expected to have a significant impact both in Europe and globally as, for example, some non-EU companies (such as those which have franchising or licensing agreements in the EU in return for royalties in excess of €22.5 million and have a net worldwide turnover of over €80 million (Article 2(1)(c)) are also caught.

When will it come into effect?

The CSDDD will come into force from the 20th day after it has been published in the Official Journal of the European Union (expected imminently).

Companies with a turnover of over €1500 million and over 5000 employees have three years to implement the CSDDD obligations. Companies with a turnover of €900 million and over 3000 employees have four years to comply, and all other companies that fall within the scope of the CSDDD have five years.

What does compliance involve?

The CSDDD outlines a comprehensive framework that companies must follow when conducting risk-based due diligence. This process must be formalised in company policy and reviewed at least every 12 months (Articles 5 and 10). Companies are also required to introduce effective complaints procedures, providing stakeholders with accessible channels to raise concerns about potential or actual adverse impacts (Article 9).

In addition to these internal procedures, rigorous due diligence regarding a company's ‘chain of activities' is central to the CSDDD (Article 6). This includes both direct and indirect suppliers who participate in the production of goods or services by a company (e.g. manufacturing, raw material supply, or product development). Downstream ‘business partners' that are involved in the delivery of a product or services, such as transport or distribution, are also subject to this same thorough due diligence.

The CSDDD places a focus on transparency and reporting. All companies that fall within the scope of this Directive are obligated to publicly disclose their due diligence findings (Article 11). Not only does this improve accountability, but it facilitates stakeholder engagement when inspecting sustainability compliance. This is further bolstered by a requirement to introduce a detailed climate mitigation transition plan that is compatible with the limiting of global warming to 1.5 °C in line with the Paris Agreement (Article 15).

Penalties and enforcement

Each member state is required to form a supervisory authority to investigate and impose proportionate penalties. These can include fines of up to 5% of a companies' net global turnover in the financial year preceding the penalty.

In addition to this enforcement, companies that fail to comply with the CSDDD, either intentionally or negligently, may be held liable for damages to any person.

Looking forward

Each member state will be given two years to formalise the directive into national law. It represents a welcome move towards regulated corporate sustainability within the EU.

It remains to be seen whether the UK will implement similar initiatives that actively tackle sustainability. An ambitious approach is necessary to meet the targets set out in the Paris Agreement. The introduction of the CSDDD will hopefully catalyse the adoption of similar directives around the world, forming part of a global effort towards sustainability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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