Corporate Sustainability Due Diligence Directive (CSDDD)
The Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) is a proposed Directive by the European Commission to create a transparent framework requiring large companies to undertake due diligence on their own activities and those of their suppliers. The core elements of this duty are identifying, ending, preventing, mitigating, and accounting for negative human rights and environmental impacts in the company’s operations, value chains and subsidiaries.
The CSDDD contains provisions on the consequences of violating its obligations. Sanctions include various actions, such as (i) publicly exposing and condemning, (ii) removing a company’s products from the market, or (iii) imposing fines amounting to at least 5% of the company’s global revenue. Non-EU companies that fail to adhere to these regulations will face a prohibition on participating in the EU’s public procurement processes.
The EU Member states will designate one or more national supervisory authorities to ensure compliance by companies to this Directive.
Under the new Omnibus proposal, large companies, whose scope is not being amended under the new proposal (described in the section below “To whom does it apply?”) are required to perform a systematic due diligence only on direct business partners. Evaluations of indirect business partners will be conducted only when credible information indicates that adverse impacts may have occurred or could potentially occur within the operations of an indirect business partner.
The CSDDD proposal aims to foster sustainable and responsible corporate behavior across global value chains, providing legal certainty and a level playing field for companies.
It also aims to create a European Union-wide transparent and predictable framework that helps companies to assess and manage sustainability risks and impacts concerning human rights and environmental risks, including those across their value chains.
The CSDDD responds to a lack of harmonised legal frameworks on European corporate due diligence obligations. Before this, no outstanding EU legislation directly covered due diligence requirements on companies’ supply chains.
The Directive targets European and non-European companies, which generate turnover in the EU. Each of them is divided into 2 groups:
- European companies:
- Group 1: Companies with more than 1000 employees and a net worldwide turnover of more than €450 Million in the last financial year;
- Group 2: Companies that entered into franchising or licensing agreements with more than €22.5 million for royalties provided that the ultimate parent company of that group had a worldwide (net) turnover of at least €80 million.
- Non-European companies:
- Group 1: Non-EU companies with a net turnover of more than €450 Million in the EU in the last financial year;
- Group 2: Companies that entered into franchising or licensing agreements with more than €22.5 million for royalties in the EU provided that the ultimate parent company of that group had EU (net) turnover of at least €80 million.
The proposed rules do not impact micro and small and medium enterprises (SMEs), but these companies could be indirectly affected as they can be part of the value chain of the larger companies in scope.
To comply with the CSDDD’s requirements, companies must:
- Integrate due diligence into all corporate policies;
- Identify actual or potential adverse human rights and environmental impacts;
- Prevent or mitigate potential impacts;
- Bring to an end or minimise actual impacts;
- Establish and maintain a complaints procedure;
- Monitor the effectiveness of the due diligence policy and measures;
- Publicly communicate on due diligence; and
- Adopt and implement a transition plan aimed at aligning with sustainability goals.
In addition, the proposed Directive sets out an obligation for large companies to adopt and put into effect a transition plan for climate change mitigation. This plan aims to ensure, through best efforts, that the company’s business model and strategy are compatible with the transition to a sustainable economy and with the goal of limiting global warming to 1.5°C, in line with the Paris Agreement and the objectives of achieving climate neutrality as established in Regulation (EU) 2021/1119, including its intermediate and 2050 climate neutrality targets.
Next steps: On July 25 2024, the CSDDD entered into force. Member states will have two years to transpose the new rules into their national laws. The Omnibus proposal postpones to 26 July 2027 this deadline.
The CSDDD introduces new corporate due diligence duties across companies’ value chains and subsidiaries and, in principle, once applicable it will cover companies across all sectors, including the financial services sector.
The current CSDDD proposal defines the value chain of financial companies providing loans, credit, or other financial services as limited to the clients’ activities – and, if it might be the case, their subsidiaries – receiving such services. The CSDDD also specifies that the value chain of financial companies does not cover households and natural persons not acting in a professional capacity, and micro and SMEs that are receiving loans, credit, financing, insurance or reinsurance. In addition, according to the CSDDD, regulated financial companies providing loans, credit, or other financial services should identify the negative human rights and environmental impacts only at the contract’s start.
Including financial companies in the CSDDD scope is currently a discussion topic among EU Institutions and Member States. Since the financial sector is not included in the list of high-impact sectors, the European Council proposes leaving it up to the Member States to decide whether the CSDDD obligations should apply to financial companies.
The introductory section of the CSDDD proposal, “Context of the proposal”, explains that the CSDDD is linked to different European sustainable finance legislative pieces:
- The CSDDD complements the Taxonomy Regulation as it aims at collecting information on companies and their value chains that can be used in the context of the EU Taxonomy-alignment assessments. Art. 18 of the Taxonomy Regulation sets out basic measures companies should follow to ensure they align with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. However, it doesn’t impose any significant obligations on companies other than the need to report publicly. In this respect, the CSDDD will set the regulatory framework that allows the collection of information that can be used to assess the alignment of economic activities with the EU Taxonomy. Visit the EU Taxonomy section for further information.
- The CSDDD complements the Sustainable Finance Disclosure Regulation (SFDR). Notably, Financial Market Participants (FMPs) with more than 500 employees are required by the SFDR to publish a statement on their due diligence policies concerning Principal Adverse Impacts (PAIs) of their investment decisions on sustainability factors on a comply or explain basis. In this respect, the CSDDD will set the regulatory framework that allows the collection of information that can be used to publish this statement. Visit the SFDR section for further information.
- The CSDDD is also linked to the Corporate Sustainability Reporting Directive (CSRD). The latter sets up certain reporting obligations whose content will be, in some cases, provided by the CSDDD. Visit the CSRD section for further information. In particular:
- The CSRD requires setting up processes to collect information for reporting purposes closely related to identifying adverse impacts per the due diligence duty set up by the CSDDD;
- The CSDDD will set obligations for companies to ensure the business model and strategy are compatible with the transition to a sustainable economy and with limiting global warming to 1.5 °C in line with the Paris Agreement goals against which the CSRD requires to report;
- Overall, the CSRD will cover the last step, namely the reporting stage, of the due diligence duty for companies covered by the CSDDD.
There are no specific adaptations in the Luxembourg regulatory framework with regards to this matter.
- 2024:
- 15 March 2024: Member states voted a new text in COREPER;
- 24 April 2024: The European Parliament Plenary approved the CS3D political agreement;
- 24 May 2024: The Council has formally adopted the CSDDD;
- 5 July 2024: The CSDDD has been published in the Official Journal of the EU;
- 25 July 2024: The CSDDD entered into force.
- 2027: Following a two-year grace period for Member States to transpose the requirements into national laws, the expected requirements listed above are supposed to apply to “Group 1 companies”.
- 2029: The expected provisions will most likely be applicable as of this year for “Group 2 companies”.
If the new Omnibus proposal gets accepted the above dates would be deferred as follows:
- The transposition date for Member States to include changes required under Omnibus would be deferred to 26 July 2027.
- The application date would be deferred to 26 July 2028 for:
- EU entities with more than EUR 900 million in turnover and 3,000 employees, and
- non-EU entities generating over EUR 900 million in turnover in the EU
- The Omnibus proposal advances the adoption of due diligence guidelines to July 2026.
- 23 February 2022: The European Commission issued its proposal for CSDDD;
- November 2022: The EU Council released a ‘general approach’ to the proposal;
- 1 June 2023: The CSDDD proposal was adopted by the European Parliament;
- 5 July 2024: The CSDDD text has been published in the Official Journal of the EU and the Directive enters into force 20 days after publication. Member states will have two years to transpose the new rules into their national laws;
- 25 July 2024: The CSDDD entered into force;
- 26 February 2025: The European Commission published Omnibus proposals to reduce sustainability disclosure requirements and administrative burdens as part of its plan to strengthen competitiveness and boost growth in the EU. The below dates would be subject to change as described in the “what are the key dates” section;
- 2027: The expected provisions will most likely be applicable as of this year for “Group 1 companies”;
- 2029:The expected provisions will most likely be applicable as of this year for “Group 2 companies”.
For further information, visit the “To whom does it apply?” part.
Currently, there is no consultation pending or open.
- CSDDD – Proposal for a Directive on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937
- Factsheet – Just and sustainable economy
- Final text endorsed in COREPER on 15 March 2024
- CSDDD text in the Official Journal of the EU
- Omnibus: Proposal for a Directive of the European Parliament and of the Council amending amending Directives 2006/43/EC, 2013/34/EU, (EU) 2022/2464 and (EU) 2024/1760 as regards certain corporate sustainability reporting and due diligence requirements
