European Parliament adopts the Corporate Sustainability Due Diligence Directive

This is a key stage in a lengthy process that began on 23 February 2022 when the European Commission published a proposal for a Directive. Since then, negotiations have gone back and forth, with significant uncertainty as to the eventual outcome, until a political compromise was eventually approved by the EU Council in March this year. It has now been ratified by the Parliament.

The final text must now be officially endorsed by the Council before it is published in the Official Journal of the EU in the coming weeks. It will enter into force 20 days after publication and member states will have two years to transpose it into national law.

Relationship between the CSDDD and CSRD

The CSDDD complements the existing legislation published under the 2019 European Green Deal, which aims to make the EU the first climate-neutral continent by 2050. In particular, it complements the Corporate Sustainability Reporting Directive (CSRD), which sets out new sustainability reporting requirements for some companies from 1 January 2024.

In contrast to the CSRD, which sets transparency requirements without imposing any behaviour to companies, the CSDDD sets out actions that must be taken by companies falling within its scope. The CSRD and ESRS (European Sustainability Reporting Standards) do not include any due diligence requirements. The CSDDD, on the other hand, will require companies within its scope to implement due diligenceprocesses relating to human rights and the environment, using a risk-based approach. Similarly, ESRS do not require reporting entities to adopt or implement a transition plan that is compatible with the global warming limit of 1.5°C set out in the Paris Agreement, even if mitigation of climate change is a material topic for the entity. In contrast, the CSDDD will require companies to adopt and implement a transition plan.

Moreover, although the European legislator has endeavoured to align the definitions set out in the CSRD and ESRS with those in the CSDDD as far as possible, companies will need to carry out a detailed comparative analysis to ensure the specific requirements of the CSDDD are met, particularly as regards the value chain. In fact, the CSDDD refers to the “chain of activities” rather than the “value chain”, which is the term used in the CSRD. The text specifies that “chain of activities” does not include the activities of downstream business partners related to the services of the company. If a company manufactures products, its downstream activities (i.e. distribution, transport and storage) only include those carried out by its direct business partners (i.e. those acting for the company or on behalf of the company). Finally, it should be noted that financial undertakings do not need to take account of downstream activities (at least not at this stage).

New requirements for companies

Companies that fall within the scope of the CSDDD must carry out the following actions in order to meet its requirements:

• integrate due diligence into their policies and risk management systems;
• identify and assess actual or potential adverse impacts, and where necessary prioritise them;
• prevent and mitigate potential adverse impacts, and bring actual adverse impacts to an end and minimise their extent;
• provide remediation for actual adverse impacts;
• carry out meaningful engagement with stakeholders;
• establish and maintain a notification mechanism and a complaints procedure;
• monitor the effectiveness of their due diligence policy and measures;
• publicly communicate on their due diligence policy and measures through an annual report published on their website.

Regarding this last point, companies that also fall within the scope of the CSRD should automatically fulfil this communication requirement by publishing the mandatory information required by the Disclosure Requirement GOV-4 of ESRS 2. This DR requires companies to provide a mapping of the information on the company’s due diligence process that is included in the sustainability statement.

By 31 March 2027 at the latest, the Commission will adopt supplementary delegated acts that set out the content and criteria for the annual report required under the CSDDD, specifying, in particular, the detailed information required on the description of due diligence procedures, actual and potential adverse impacts identified, and appropriate measures taken with respect to those impacts. The CSDDD specifies that the Commission shall take into account ESRS and align the delegated acts with them to the extent appropriate.

Penalties and civil liability regime

If a company within the scope of the CSDDD does not meet the requirements set out in the Directive, as transposed into national law, the company may face financial penalties, to be defined by each member state within a framework set out in the CSDDD. Thus, the maximum penalty payable by a company shall be not less than 5% of its net worldwide turnover in the financial year preceding that of the decision to impose the penalty.

Member states must also lay down rules ensuring that a company can be held legally responsible for damage caused to a natural or legal person, but shall not be held responsible if the damage was caused by a business partner in its chain of activities.

Finally, it should be noted that the sections on directors’ duties that were originally included in the February 2022 draft of the legislation have been removed from the text adopted by the European Parliament in April 2024.

Scope

The scope of the CSDDD differs from that of the CSRD, with the CSDDD mainly targeting larger companies. Like the CSRD, it includes rules on non-EU companies, which will be covered by the CSDDD if they meet certain criteria. In practice, the CSDDD will thus affect both EU companies and non-EU companies.

EU companies:

• companies or groups (in cases where the company does not reach the thresholds set for individual companies, but the ultimate parent company reaches the thresholds for all the consolidated companies taken together) with more than 1,000 employees on average and a net worldwide turnover of more than €450m in the last financial year for which annual financial statements have been or should have been adopted;
• companies or groups that entered into franchising or licensing agreements in the EU in return for royalties with independent third-party companies of more than €22.5m in the last financial year for which annual (consolidated) financial statements have been or should have been adopted, and provided that the company or group had a net worldwide turnover of more than €80m in the same period;

Non-EU companies:

• companies or groups (in cases where the company does not reach the threshold set for individual companies, but the ultimate parent company exceeds the threshold for all the consolidated companies taken together) with a net turnover of more than €450m in the EU in the financial year preceding the last financial year;
• companies or groups that entered into franchising or licensing agreements in the EU in return for royalties with independent third-party companies of more than €22.5m in the EU in the financial year preceding the last financial year, provided that the company or group had a net turnover of more than €80m in the EU in the same period. These thresholds have been raised from the draft Directive of February 2022, which proposed that European companies with more than 500 employees and a net worldwide turnover of more than €150m would fall within its scope.

Implementation schedule

The compromise text of the CSDD phases in the requirements over several years, as follows:

• 2027, i.e. three years from the entry into force of the Directive (actions to be implemented over this financial period and reported on in 2028):                                o  EU companies or groups with more than 5,000 employees on average, and net worldwide turnover of more than €1,500m;                                            o  non-EU companies or groups with a net turnover of more than €1,500m in the EU;
• 2028, i.e. four years from the entry into force of the Directive (actions to be implemented over this financial period and reported on in 2029)                                      o  EU companies or groups with more than 3,000 employees on average and a net worldwide turnover of more than €900m;                                              o  non-EU companies or groups with a net turnover of more than €900min the EU;
• 2029 (actions to be implemented over this financial period and reported on in 2030): all other companies that fall within the scope of the CSDDD.