Name of Act: Directive on Corporate Sustainability Due Diligence*
Entry into force: 25 July 2024.
To which businesses will it apply?
- EU companies and ultimate parent companies with more than 1,000 employees and a net worldwide annual turnover higher than €450 million in the last financial year.
- Non-EU companies and ultimate parent companies with more than €450 million net turnover generated in the EU in the financial year preceding the last financial year. Unlike the Corporate Sustainability Reporting Directive (“CSRD”), this will apply irrespective of whether the non-EU company has a registered entity domiciled in the EU.
- EU and non-EU companies that have entered into franchising or licensing agreements in the EU with third-party companies in return for royalties. The CSDDD covers EU franchising companies with more than €22.5 million in royalties and a net worldwide turnover of more than €80 million in the last financial year. The Directive covers non-EU franchising companies with more than €22.5 million in royalties in the Union and a net turnover in the Union of more than €80 million in the last financial year preceding the last financial year.
The Directive will apply to companies that meet those conditions for two consecutive financial years.
Although not covered by the Directive, small and medium enterprises (“SMEs”) could be impacted as contractors or subcontractors to covered companies, for example where a company within the scope of the CSDDD looks to flow down due diligence obligations to its suppliers and contractors.
What will businesses be required to do?
Conduct human rights and environmental due diligence in accordance with the UN Guiding Principles on Business and Human Rights and OECD Guidelines for Multinational Enterprises. This comprises:
- Integrating due diligence into policies and management systems
- Identifying and assessing adverse impacts
- Preventing, ceasing, or minimizing actual and potential adverse impacts
- Monitoring and assessing the effectiveness of measures
- Communicating how impacts are addressed
- Providing for or cooperating in remediation when appropriate
Publish a due diligence policy and account for due diligence in annual, public reports (in accordance with the separate Corporate Sustainability Reporting Directive). Companies that fall within the scope of the CSRD and CSDDD and report in accordance with the requirements set out in the CSRD are deemed to have complied with the reporting obligations under the CSDDD.
Put into effect a transition plan for climate change mitigation that complies with the Paris Agreement goal to limit global warming to 1.5°C and with the EU objectives to achieve climate neutrality by 2050.
When will it come into effect?
EU Member States have two years from the entry into force of the Directive to enact transposition measures (i.e., by July 26, 2026). The measures will apply to the companies affected within three to five years from the entry into force of the CSDDD, as set out by the following staggered timetable:
- EU companies and ultimate parent companies with more than 5,000 employees and an annual net turnover higher than €1,500 million: from July 26, 2027 (for due diligence obligations) and for financial years starting on or after 1 January 2028 (for reporting obligations);
- EU companies and ultimate parent companies with more than 3,000 employees and an annual net turnover higher than €900 million: from July 26, 2028 (for due diligence obligations) and for financial years starting on or after 1 January 2029 (for reporting obligations);
- Non-EU companies and ultimate parent companies that have generated a net turnover in the EU higher than €1,500 million: from July 26, 2027 (for due diligence obligations) and for financial years starting on or after 1 January 2028 (for reporting obligations);
- Non-EU companies and ultimate parent companies that have generated a net turnover in the EU higher than €900 million: from July 26, 2028 (for due diligence obligations) and for financial years starting on or after 1 January 2029 (for reporting obligations);
- EU companies and ultimate parent companies with more than 1000 employees and an annual net turnover higher than €450 million, and non-EU companies and ultimate parent companies with an annual net turnover higher than €450 million generated in the EU, as well as companies with a franchising or licensing business model that fall under the scope of the Directive: from July 26, 2029 (for due diligence obligations) and for financial years starting on or after 1 January 2029 (for reporting obligations).
Which rights are covered?
Specified human rights impacts derived from the core UN human rights treaties and International Labor Organization Core Conventions and any measurable environmental degradation, such as harmful soil change, water or air pollution, harmful emissions or excessive water consumption or other impacts on natural resources.
Does the due diligence obligation extend to the entire value chain?
No. Unlike the Commission’s original proposal (see K&S Client Alert), the approved text has opted for a narrower concept of “chain of activities”, covering only specifically listed parts of the value chain. The chain of activities covers activities of a company’s upstream business partners related to the production of goods or the provisions of services by the company, as well as activities of a company’s downstream business partners related to the distribution, transport and storage of the product for the company or on its behalf.
There is a specific carve out for the financial services sector, whereby their due diligence obligations do not need to extend to downstream business partners that are receiving their products and services.
The due diligence obligation also extends to the companies’ own operations and operations of their subsidiaries.
What are the sanctions for non-compliance?
- Administrative penalties imposed by Member States of no less than 5% of the net worldwide turnover.
- Public statements by the Member States indicating the company responsible for infringement and the nature of the infringement.
- Civil damages where the victim of an adverse impact can demonstrate that harm was suffered as a consequence of a failure to implement adequate due diligence. With respect to civil damages, a company would not be liable where damage was caused “only” by its business partners in its chain of activities (for example, suppliers).
Compliance with the Directive can be qualified as a criterion for the award of public contracts and concessions.
*External links
Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859.
K&S Client Alert on the Directive on Corporate Sustainability Due Diligence.
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