Corporate sustainability due diligence directive – what’s next?

The Corporate Sustainability Due Diligence Directive (CSDDD) is back in the spotlight. The EU Council vote on whether to endorse the final draft of the Directive was recently delayed again due to abstentions from EU Member States including Germany and Italy. This article recaps what the CSDDD is, who it applies to and amongst the uncertainty, what companies should be thinking about next.

What is the CSDDD?

The CSDDD is landmark legislation that establishes a corporate due diligence duty on EU and non-EU companies to conduct human rights and environmental due diligence throughout their global value chains. Key obligations under the CSDDD include six due diligence steps: (1) adopt a due diligence policy, (2) identify actual and potential human rights and environmental impacts arising from operations, (3) prevent or mitigate these impacts, (4) establish a complaints procedure, (5) monitor measures and (6) publicise relevant due diligence information e.g. via annual reports. Larger companies will also need to adopt and implement a climate transition plan that is compatible with the Paris Agreement i.e. with limiting global warming to 1.5 degrees celsius above pre-industrial levels. National bodies can impose penalties of up to 5% of a company’s worldwide turnover. There is also a civil liability route whereby claimants can seek compensation for damages suffered from a company’s failure to comply with its CSDDD obligations.

Who does the CSDDD apply to?

• EU: Large EU limited liability companies with more than 500 employees and a worldwide annual turnover of more than EUR 150 million (“Group 1”). For EU companies in ‘high impact’ sectors like textiles, agriculture, and mineral extraction, the in-scope thresholds are lower: more than 250 employees and a worldwide annual turnover of more than EUR 40 million (“Group 2”). -
• Non-EU but EU active: Non-EU companies will also be caught if they are active in the EU and meet the Group 1 or Group 2 turnover thresholds for revenue generated in the EU.

There are different phase-in requirements for different categories of companies but under the current proposals, larger companies will have three years to comply from the Directive’s implementation i.e. 2027 at the earliest while others will have four to five years.

What are the next steps?

The CSDDD has extraterritorial reach and represents a major shift from a voluntary to mandatory approach on corporate responsibility, so companies will be keeping a close eye on how the legislation progresses. The final draft of the Directive cannot be amended in its current state so if it is rejected by the EU Council, it may be delayed for a while. There is a fear amongst supporters of the Directive that a delay until after the European Parliament elections in June could lead to a watering down of its provisions. However, it is likely that the CSDDD will be implemented in some form. Two key points for all companies to consider will include:

• Due diligence policies: To what extent human rights and environmental impacts are already identified, prevented and /or mitigated in operations and how can policies be improved or implemented to satisfy CSDDD requirements. -
• Supply chain: CSDDD will involve seeking contractual reassurances from suppliers on the adequate management and mitigation of environmental and human rights issues. Companies should carefully review their supply chains and consider appropriate contractual mechanisms, including remedy, liability and termination provisions that reflect the risks of non-compliance.

The ultimate scope of CSDDD will materialise in the next few months, but it is likely to be the most extensive set of corporate responsibility obligations on companies to date. Preparing for its implementation will put companies in good stead for a regulatory landscape where high levels of accountability are becoming increasingly part of ‘business as normal’.