Corporate Sustainability Due Diligence Directive

Corporate Sustainability Due Diligence Directive

What is the scope of the Corporate Sustainability Due Diligence Directive?

Obligations under the CSDDD will apply to the following:

• EU companies which fulfil one of the following conditions:
  • The company had more than 1,000 employees on average and had a net worldwide turnover of more than 450 million euro in the last financial year for which annual financial statements have been or should have been adopted
  • The company did not reach the thresholds referred to above but is the ultimate parent company of a group that reached those thresholds in the last financial year for which consolidated annual financial statements have been or should have been adopted
  • The company 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 22.5 million euro in the last financial year for which annual financial statements have been or should have been adopted, and provided that the company had or is the ultimate parent company of a group that had a net worldwide turnover of more than 80 million euro in the last financial year for which annual financial statements have been or should have been adopted.

• Non-EU companies which fulfil one of the following conditions:
  • The company generated a net turnover of more than 450 million euro in the EU in the financial year preceding the last financial year
  • The company did not reach the threshold referred to above 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
  • The company 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 22.5 million euro 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 80 million euro in the EU in the financial year preceding the last financial year.

What are the key features of the Corporate Sustainability Due Diligence Directive?

Due diligence obligations

The CSDDD requires an in-scope company to adopt and implement sustainability due diligence processes in connection with any adverse impacts on the environment and on hman rights within the company’s own operations and in its “chain of activities”. An in-scope company will be required to:

• Integrate due diligence into its policies and risk management systems
• Identify and assess actual or potential adverse impacts on the environment and human rights
• Prevent and mitigate any potential adverse impacts on the environment and human rights
• Bring actual adverse impacts on the environment and human rights to an end and minimise their extent
• Provide remediation for actual adverse impacts on the environment and human rights
• Carry out meaningful engagement with stakeholders as part of its due diligence processes
• Establish and maintain a notification mechanism and a complaints procedure for legitimate concerns regarding actual or potential adverse impacts on the environment and human rights
• Monitor the effectiveness of its due diligence policy and measures, and
• Publicly communicate on its due diligence policy and measures

A company’s “chain of activities” for the purposes of the CSDDD includes all activities of its upstream business partners relating to the production of goods or the provision of services by the company and all activities of its downstream business partners relating to the distribution, transport and storage of the product, where the business partners carry out those activities for the company or on behalf of the company.

Climate change action plan

Companies within the scope of the CSDDD must adopt and implement a transition plan for climate change mitigation. The plan must aim to ensure that a company’s business model and strategy 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 and the objective of achieving climate neutrality. The plan must be reviewed and updated every 12 months and should contain a description of the progress made towards achieving the targets set by the company.

Penalties

Member States will be required to appoint supervisory authorities to enforce national CSDDD laws. Penalties will be set by the Member States themselves but must be effective, proportionate and dissuasive. They must include, at a minimum, financial penalties and “naming and shaming” provisions which permit Member States to make public statements identifying companies which are responsible for infringements and the nature of those infringements. Financial penalties will be based on a company’s net worldwide turnover. Maximum penalties must not be less than 5% of net worldwide turnover.

Civil liability

The CSDDD expressly provides for a company to be held liable for damage caused to natural or legal persons arising from the company’s intentional or negligent failure to comply with certain CSDDD obligations. These measures aim to facilitate greater access to justice by increasing the ability of individuals to bring claims through new provisions on the disclosure of evidence, costs and injunctive measures.

Public procurement

Compliance with CSDDD must be taken into account as part of the criteria for the award of public contracts and concessions.

When will the Corporate Sustainability Due Diligence Directive come into force?

EU Member States have until 26 July 2026 to transpose the CSDDD into their national laws. The national legislation must apply the CSDDD measures to companies within the scope of the CSDDD on a phased basis in accordance with the following timeline:

From 26 July 2027:

• EU companies with over 5,000 employees on average and a net worldwide turnover of more than 1,500 million euro in the last financial year preceding 26 July 2027, and
• Non-EU companies with over 1,500 million euro net turnover generated in the EU in the financial year preceding the last financial year preceding 26 July 2027

Communication obligations will not apply until financial years starting on or after 1 January 2028. Those communication obligations will be satisfied by any company which carries out sustainability reporting in accordance with the Corporate Sustainability Reporting Directive (CSRD).

From 26 July 2028:

• EU companies with over 3,000 employees on average and a net worldwide turnover of more than 900 million euro in the last financial year preceding 26 July 2027, and
• Non-EU companies with over 900 million euro net turnover generated in the EU in the financial year preceding the last financial year preceding 26 July 2027

Communication obligations will not apply until financial years starting on or after 1 January 2028. Those communication obligations will be satisfied by any company which carries out sustainability reporting in accordance with the Corporate Sustainability Reporting Directive (CSRD).

From 26 July 2029:

• All other in-scope companies

Communication obligations will not apply until financial years starting on or after 1 January 2029. Those communication obligations will be satisfied by any company which carries out sustainability reporting in accordance with the Corporate Sustainability Reporting Directive (CSRD).

Impact of the Corporate Sustainability Due Diligence Directive

The ESG regulatory landscape in the EU is evolving rapidly. Alongside the reporting obligations imposed by the Corporate Sustainability Reporting Directive, which is now integrated into Irish company law, the CSDDD obligations highlight the EU’s heightened focus on corporate transparency and accountability for sustainability performance and impact.

The obligations imposed by the CSDDD will not begin coming into effect until 2027. However, scoping, planning and implementing the necessary level of due diligence will be complex. Preparation in good time will be vital, even for companies with existing sustainability due diligence processes.

Please contact a member of our Corporate Governance team to discuss how we can help you to prepare.

The content of this page is provided for information purposes only and does not constitute legal or other advice.