The Adoption of the EU's Corporate Sustainability Due Diligence Directive

The much-anticipated Corporate Sustainability Due Diligence Directive was finally adopted by the Council of the EU on 24 May 2024. It is the latest in a package of measures designed to promote sustainable economic growth across the EU. It aims to hold large corporations accountable for their direct and indirect adverse environmental and human rights impacts. ESG Partners Emer Shelly and Jay Sattin discuss how the Directive will now be implemented across the EU.

We previously examined the status and scope of the draft Corporate Sustainability Due Diligence Directive (CSDDD or CS3D). In what was the final step in the EU legislative decision-making process, the Council of the EU officially adopted the CSDDD on Friday, 24 May 2024. The step marks a new age of corporate accountability for adverse environmental and human rights impacts within the EU.

We take a look at how the CSDDD will now be implemented and enforced across the EU.

Purpose

The CSDDD introduces obligations for many large companies to identify and address negative impacts on human rights and environmental protection in their own businesses and throughout their chains of activities. An in-scope company may be held liable for the damage caused by any failure to comply with its CSDDD obligations and may also be subject to significant financial penalties.

Timeline

Having now been adopted by both the European Parliament and the Council of the EU, the CSDDD will shortly be published in the Official Journal of the European Union. It will enter into force 20 days after its publication.

Member States will then be required to transpose the CSDDD into their national laws within two years.

Within that timeframe, Member States must also establish a supervisory authority to ensure compliance with the CSDDD. Obligations will then begin to apply to in-scope companies one year later. However, the rules will apply on a phased basis as follows:

• Within 3 years of the CSDDD coming into force, expected to be from 2027:
  • EU companies with over 5,000 employees and a net worldwide turnover of more than €1,500 million, and
  • Non-EU companies with over €1,500 million net turnover generated in the EU in the year preceding their last financial year
• Within 4 years of the CSDDD coming into force, expected to be from 2028:
  • EU companies with over 3,000 employees and a net worldwide turnover of more than €900 million, and
  • Non-EU companies with over €900 million net turnover generated in the EU in the year preceding their last financial year
• Within 5 years of the CSDDD coming into force, expected to be from 2029:
  • EU companies with over 1,000 employees and a net worldwide turnover of more than €450 million, and
  • Non-EU companies with over €450 million net turnover generated in the EU in the year preceding their last financial year

Guidelines are expected to be issued by the Commission to help companies to conduct the due diligence required by the CSDDD.

Conclusion

The CSDDD obligations will only begin to apply from 2027 onwards. 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. Early review and updating of current policies and practices will assist companies in identifying gaps and the issues to be addressed to ensure alignment with the requirements of the CSDDD.

In addition, companies outside the scope of the CSDDD are likely to face increasing demand for sustainability information and actions to the extent that they are within the chain of activities of an in-scope company. Those requests will most likely relate to the identification, prevention, mitigation and remediation of adverse impacts associated with the company’s operations. As a result, out of scope companies will not be immune from the impact of the CSDDD.

For more information and expert guidance on CSDDD or the Corporate Sustainability Reporting Directive generally and how your business may be affected, please contact a member of our Corporate Governance or ESG teams.

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