EU Corporate Sustainability Due Diligence Directive

The CSDDD forms part of the EU’s wider Green Deal initiative, alongside other Directives such as the Corporate Sustainability Reporting Directive (CSRD). Unlike the CSRD, which focuses on general transparency and ESG reporting requirements, the CSDDD sets out:

• obligations on companies relating to
  
  ‘actual and potential human rights adverse impacts and environmental adverse impacts, with respect to their own operations, the operations of their subsidiaries, and the operations carried out by their business partners in companies’ chains of activities’;
• liability for violations of these obligations; and
• an obligation to adopt and put into effect a transition plan for climate change mitigation.

In practice, an in-scope company will have a duty to identify, prevent and eradicate (or mitigate) the adverse impact its activities have on human rights and the environment, including slavery, child labour, labour exploitation, biodiversity loss, pollution and destruction of natural heritage. It is worth pointing out that the previous text extended this duty to “indirect” relationships within the supply chain, but this has now been narrowed to business partners that carry out activities directly for the company.

Initially the CSDDD was designed to apply to EU companies with a minimum of 500 employees and a turnover of €150 million. However, the revised text increases the thresholds to a minimum of 1000 employees and a net turnover of €450 million. As a consequence, a significant number of companies (reported to be almost 70%) will no longer caught by the proposed rules.

The revised text has also dropped the previous approach of specifically targeting businesses with a higher risk of environmental or social harm.

As the CSDDD is designed to have extra-territorial effect, non-EU companies with high turnover generated in the EU are also within scope.

Based on the revised text, companies that are within scope of CSDDD would need to carry out the following human rights and environmental due diligence measures:

• implement a due diligence policy that is updated annually (including a code of conduct to be followed by the company’s employees and subsidiaries) (Article 5);
• identify actual or potential adverse impacts in their own operations, in their subsidiaries and, where related to their chains of activities, those of their business partners (Article 6);
• prevent potential, or end actual, adverse impacts, or to adequately mitigate those impacts where immediate prevention/eradication is not possible (Articles 7 and 8);
• establish a complaints procedure in respect of concerns regarding potential and/or actual adverse impacts (Article 9);
• periodically assess (at least every 12 months) the effectiveness of the due diligence measures to ensure that adverse impacts are properly identified and prevented/corrected/minimised (Article 10);
• publicly report on the due diligence findings (if they are not already subject to reporting requirements under the CSRD) (Article 11); and
• adopt a plan to ensure that their business model is compatible with the goal to limit global warming to 1.5 °C in line with the Paris Agreement (Article 15).

The CSDDD states that Member State enforcement must ensure dissuasive and proportionate enforcement. Member states will need to designate a supervisory authority in charge of investigating and imposing penalties, which can include fines of up to 5% of companies’ net worldwide turnover.

Additionally, the CSDDD will potentially increase the litigation risk exposure for in-scope companies by providing direct compensation rights for victims. Member States will be required to lay down rules governing the civil liability of companies for damages caused to a natural or legal person, provided that the company intentionally or negligently failed to prevent and mitigate potential adverse impacts. Limitation periods for bringing civil liability claims for damages should be at least five years.

As noted above, the revised text will be considered by the EU Parliament at the end of April 2024. Member States will have up to two years to adopt and publish regulations to comply with the CSDDD. The revised text has added a staged approach for compliance in order to allow companies longer to get ready for the new rules (that is, a period of between three to five years from the entry into force of the Directive, depending on the size of the company).