On 25 July 2024, the corporate sustainability due diligence directive of the EU (the “CSDDD”)[1] entered into force. It sets out rules for companies as to various due diligence obligations in respect of actual or potential adverse human rights and environmental impacts. It also introduces rules on liability and the obligation to adopt and put into effect a transition plan for climate change mitigation.
Member States shall implement the CSDDD’s provisions into their national laws until 26 July 2026. However, the application of most of the new rules will be phased in gradually from 26 July 2027 until 26 July 2029 depending on the companies’ turnover and number of employees.
Which companies are concerned?
The CSDDD applies to an EU company if it fulfils one of the following conditions in two consecutive financial years:
- it had more than 1 000 employees on average and had a net worldwide turnover of more than EUR 450 000 000 in the last financial year;
- it did not reach the above thresholds but is the ultimate parent company of a group that reached those thresholds in the last financial year;
- it entered into or is the ultimate parent company of a group that entered into franchising or licensing agreements in the EU in return for royalties with independent third-party companies, where those agreements ensure a common identity, a common business concept and the application of uniform business methods, and where those royalties amounted to more than EUR 22 500 000 in the last financial year, and provided that the company had or is the ultimate parent company of a group that had a net worldwide turnover of more than EUR 80 000 000 in the last financial year.
The CSDDD also applies to a non-EU company if it fulfils one of the following conditions in two consecutive financial years:
- it generated a net turnover of more than EUR 450 000 000 in the EU in the financial year preceding the last financial year;
- it did not reach the above threshold but is the ultimate parent company of a group that on a consolidated basis reached that threshold in the financial year preceding the last financial year;
- it entered into or is the ultimate parent company of a group that entered into franchising or licensing agreements in the EU in return for royalties with independent third-party companies, where those agreements ensure a common identity, a common business concept and the application of uniform business methods, and where those royalties amounted to more than EUR 22 500 000 in the EU in the financial year preceding the last financial year; and provided that the company generated, or is the ultimate parent company of a group that generated, a net turnover of more than EUR 80 000 000 in the EU in the financial year preceding the last financial year.
Which operations shall be examined by the companies?
The companies main obligations concern actual and potential adverse human rights and environmental impacts connected with the operations of
- the companies,
- the companies’ subsidiaries and
- the companies’ direct and indirect business partners in the companies’ chains of activities.
Under the CSDDD, ‘chain of activities’ means
- activities of a company’s upstream business partners related to the production of goods or the provision of services by that company, including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of products and the development of the product or the service; and
- activities of a company’s downstream business partners related to the distribution, transport and storage of a product of that company (with certain exceptions), where the business partners carry out those activities for the company or on behalf of the company (the activities of a company’s downstream business partners related to the services of the company are excluded).
What are the key obligations of companies?
- integration of due diligence into their policies and risk management systems;
- identification, assessment and prioritisation of actual and potential adverse impacts;
- prevention and mitigation of potential adverse impacts, and bringing actual adverse impacts to an end and minimising their extent;
- providing remediation for actual adverse impacts
- carrying out meaningful engagement with stakeholders;
- establishing and maintaining a notification mechanism and a complaints procedure;
- monitoring the effectiveness of their due diligence policy and measures;
- annually communicating on due diligence on their website.
As a last resort, if potential adverse impacts could not be prevented or adequately mitigated or actual adverse impacts could not be brought to an end or minimised, the company shall refrain from entering into new or extending existing relations with the business partner concerned and implement an enhanced action plan (including temporary suspension of business relationships). If there is no reasonable expectation that the action plan will succeed or it fails, the company shall terminate the business relationship with respect to the activities concerned if the actual/potential adverse impact is severe.
Civil liability
A company can be held liable for damage caused to a natural or legal person if
- the company intentionally or negligently failed to comply with the obligations set out in relation to prevention and mitigation of potential adverse impacts and bringing actual adverse impacts to an end and minimising their extent;
- the right, prohibition or obligation is aimed at protecting the natural or legal person; and
- as a result of the failure, damage to the natural or legal person’s legal interests that are protected under national law was caused.
A company cannot be held liable if the damage was caused only by its business partners in its chain of activities.
Administrative consequences
National supervisory authorities will be able to conduct investigations and
- order the company to cease infringements, refrain from any repetition of the relevant conduct and where appropriate, provide remediation proportionate to the infringement and necessary to bring it to an end,
- adopt interim measures in the event of an imminent risk of severe and irreparable harm and
- impose penalties.
In the Members States’ national laws, there shall be at least pecuniary penalties and if a company fails to comply with a decision imposing a pecuniary penalty within the applicable time limit, a public statement indicating the company responsible for the infringement and the nature of the infringement.
When imposed, pecuniary penalties shall be based on the company’s net worldwide turnover with a maximum limit being not less than 5 % of the net worldwide turnover. In case of ultimate parent companies (referred to in points b) of the above section “Which companies are concerned?”), pecuniary penalties shall be calculated taking into account the consolidated turnover reported by the ultimate parent company.
Climate change action plan
Companies shall adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement.
[1] 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