One Step Closer To A Sustainable EU?

On 24 April 2024, the EU Parliament approved the Corporate Sustainability Due Diligence Directive (CSDDD), moving it one step closer to formal adoption by the European Union.
European Union Corporate/Commercial Law
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An update on progress

On 24 April 2024, the EU Parliament approved the Corporate Sustainability Due Diligence Directive (CSDDD), moving it one step closer to formal adoption by the European Union. Now the measures are likely to pass into law, though the scope of the CSDDD has been significantly narrowed from the provisional agreement reached in December 2023.

To recap, the CSDDD is another initiative of the European Green Deal, one of the areas of EU law that is developing most rapidly and focuses on shaping companies' management of ESG matters. A number of EU laws in this area have already been adopted, most notably the Corporate Sustainability Reporting Directive (CSRD) and the Taxonomy Regulation.

The CSDDD creates a legal liability for companies relating to environmental and human rights violations within their supply chain. Companies must identify, assess, mitigate and remedy negative impacts on human rights and the environment across their chains of activity. These obligations will include formal analysis of the risks and associated controls relating to wide ranging human rights and environmental issues including child labour, slavery, pollution, deforestation, excessive water consumption and damage to ecosystems.

In-scope companies will need to integrate due diligence into their policies and risk management systems, as well as establish and maintain a notification mechanism and complaints procedure. They will also have to monitor the effectiveness of the measures and publicly communicate on due diligence through CSRD compliant reports or annual statements.

Key highlights

1. Size thresholds

The new agreement significantly narrows the scope of the directive, excluding almost 70% percent of companies originally in scope of the draft CSDDD as agreed upon between the European Parliament and Council of Ministers in December 2023.

The size thresholds for companies subject to the updated CSDDD have been adjusted as follows:

EU Companies

  • Number of employees in EU: more than 1,000
  • Turnover: EUR 450 million

Non-EU Companies

  • Number of employees in EU: N/A
  • Turnover: EUR 450 million.

Ultimate parent companies

  • Ultimate parent companies (EU or non-EU) of a group or subsidiaries reaching the above thresholds may be within the scope of the CSDDD even if the parent itself does not meet the thresholds.
  • Where the ultimate parent company does not engage in management, operational or financial decisions affecting the group, it may apply to the relevant competent supervisory authority for an exemption.
  • The exemption will be granted only if an operational subsidiary established in the EU fulfils certain obligations and the ultimate parent company remains jointly liable with the subsidiary for failure to comply with these obligations.

2. Phased implementation

Companies falling within the scope must comply according to specific timelines defined by their workforce size and revenue:

  • 2027: Companies with over 5,000 employees and a turnover exceeding EUR 1.5 billion.
  • 2028: Companies exceeding 3,000 employees and a turnover above EUR 900 million.
  • 2029: Companies with more than 1,000 employees and a turnover exceeding EUR 450 million.

3. High impact sectors

The directive no longer includes separate provisions, with lower thresholds, for companies operating in high-impact sectors, such as textiles, agriculture and the extraction of minerals. The scope of downstream value chain activities has also been reduced. It is now expected that the CSDDD will affect approximately 5,500 companies, a significant reduction from 16,000.

4. Directors' duties

The original CSDDD proposal would have required directors, when fulfilling their duty to act in the best interests of the company, to consider the consequences of their decisions for sustainability matters. Directors would have had an obligation to consider, where applicable, human rights, climate change and environmental consequences including the short, medium and long-term consequences.

This provision was strongly opposed by the European Council and ultimately removed from the provisional agreement. However, member states are not prohibited from incorporating such a duty into their national laws upon implementing the CSDDD.

The earlier proposed CSDDD also contemplated incentivising directors by linking their variable remuneration to companies' long-term planning as part of the climate change mitigation transition plans, if the company had over 1000 employees. The European Council also removed this requirement as part of the agreement on the compromise text.

Relationship with other EU Laws Protecting Human Rights and the Environment

The CSDDD is part of a series of EU regulations aimed at protecting human rights and the environment. In this context, the CSDDD will become the "default" EU due diligence regime. However, the directive expressly provides that its obligations are without prejudice to other, more specific EU regimes. Therefore, if a provision of the CSDDD conflicts with another regime providing more extensive obligations, then the latter will prevail.

For example, the action plans required by the updated CSDDD are similar to those under the CSRD. Though the CSDDD establishes an obligation to adopt a climate change mitigation transition plan, companies already complying with CSRD reporting will not need a separate plan under the CSDDD.

Next steps

Following the European Parliament's vote on 24 April 2024, the European Council will formally endorse the directive, sign and publish it in the EU Official Journal. It will enter into force twenty days later. Member states will then have up to two years to transpose the directive into national law, although they may do so any time after its adoption. Obligations for the largest companies would then start to apply to companies from 2027, whilst obligations around reporting would begin from 1 January 2028.

All companies doing business in the EU should consider whether they are within the scope of the CSDDD and review their due diligence processes and policies to consider whether they will be compliant with the requirements of the CSDDD. Companies should also monitor the introduction of national legislation that may be added by member states when the CSDDD is transposed into national law. Companies already subject to national legislation on supply chains and/or human rights (e.g. the German Supply Chain Act or the French Vigilance Law) should analyse the extent to which their existing processes and disclosures will ensure compliance with the new CSDDD obligations, and where gaps exist that still need to be addressed.

A further update will be provided following the publication of the CSDDD in the Official Journal of the EU.

Originally published May 7, 2024

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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