The EU's Corporate Sustainability Due Diligence Directive

The long-awaited Corporate Sustainability Due Diligence Directive is on its way to becoming law in the EU. The new framework will hold large corporations, including many in the life sciences sector, accountable for their environmental and human rights impacts. ESG Partners Emer Shelly and Jay Sattin take a look at the proposals.

The Corporate Sustainability Due Diligence Directive (CSDDD, or CS3D) is one of a package of measures designed to promote sustainable economic growth across the EU. It proposes to introduce a harmonised regulatory framework which obliges certain companies to implement due diligence processes. These processes aim to identify, mitigate and bring to an end any adverse impacts on human rights and the environment within a company’s own operations and in its “chain of activities”.

The proposed final draft CSDDD was approved in the European Parliament on 24 April 2024. It is expected to be finally approved by the Council of the EU at the end of May. The draft is a watered-down version of the original proposal, with a number of significant concessions having been made to get the proposals over the line.

We take a look at the key points:

Scope

The CSDDD will apply to:

• 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

CSDDD obligations will also apply to parent companies of groups which meet the thresholds on a consolidated basis. However, a parent company which does not take “management, operation or financial decisions” affecting the group or its subsidiaries may apply for an exemption from certain obligations. Instead, the parent company can designate a member of its group to fulfil those obligations. The parent company and the designated subsidiary will be jointly liable for any failure to comply with those obligations.

Earlier proposals relating to lower thresholds for certain high-impact sector companies have been removed from the CSDDD. However, the European Commission will be obliged to review any requirement for a sector-specific approach after six years and periodically thereafter.

Timing

The obligations will be phased in over a number of years as follows:

• Within 3 years of the CSDDD coming into force:
  • 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:
  • 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:
  • 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

Due Diligence Obligations

The CSDDD will require in-scope companies to:

• Integrate due diligence into policies and risk management systems
• Identify and assess actual or potential adverse impacts in their own operations and in their chain of activities
• Prevent and mitigate potential adverse impacts in their own operations and in their chain of activities, and
• Bring actual adverse impacts in their own operations and in their chain of activities to an end and provide remediation

Due diligence obligations under previous iterations of the CSDDD extended to both upstream and downstream activities across a company’s entire value chain. However, the proposed final version of the CSDDD now limits those obligations to a company’s “chain of activities”. This narrower concept includes only:

1. Activities of a company’s upstream business partners related to the production of goods or the provision of services by the company, and
2. Activities of a company’s downstream business partners related 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

The CSDDD also requires in-scope companies to implement a notification and complaints procedure. In addition, in-scope companies must monitor the effectiveness of all policies and measures taken in compliance with the CSDDD. The CCSDD also includes communication requirements. However, a sustainability report prepared and published in compliance with the separate Corporate Sustainability Reporting Directive (CSRD) will satisfy CSDDD communication requirements.

Climate Change Action Plan

The obligation to put in place a climate change action plan has survived in the final draft CSDDD and, in fact, goes further than the original proposal. In-scope companies must adopt and put into effect a plan for climate change mitigation. The plan must:

1. Aim to ensure that the company’s business model and strategy aligns with the Paris Agreement target of limiting global warming to 1.5°C, and
2. Align with the EU’s goal of achieving climate neutrality by 2050
   

The transition plan must be reviewed and updated every 12 months, including by reporting on progress.

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 provides for companies to be held liable for damage caused to natural or legal persons arising from a company’s intentional or negligent failure to comply with certain CSDDD obligations. The ability of individuals to bring claims has been bolstered by new provisions on the disclosure of evidence, costs and injunctive measures. These measures are designed to facilitate greater access to justice for those affected by breaches of CSDDD.

Public procurement

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

Conclusion

After a period of uncertainty earlier this year, the CSDDD now looks set to enter into law in the next few months. Whilse the final draft reflects compromises, particularly regarding the number of companies within its scope, the framework will mark a significant step forward towards ensuring sustainable practices among large corporations operating across the EU. With sustainability reporting obligations under the CSRD also now in force, the new regulatory landscape in the EU continues to evolve. The new frameworks emphasise the EU’s focus on corporate transparency and accountability on ESG performance and impact.

For more information and expert guidance on CSDDD or CSRD and how your business may be affected, please contact a member of our Corporate Governance team.

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