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.
Once the Directive is approved, the EU Member states will designate one or more national supervisory authorities to ensure compliance by companies to this Directive.
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 500 employees and a net worldwide turnover of more than €150 Million in the last financial year;
- Group 2: Companies with more than 250 employees and a net turnover worldwide of more than €40 Million in the last financial year, provided that at least 50% of this turnover was generated in one or more “high-impact sectors” (e.g., textiles, agriculture, extraction of minerals). The complete list of high-impact sectors for CSDDD is provided at recital 22 of the CSDDD proposal.
- Non-European companies:
- Group 1: Non-EU companies with a net turnover of more than €150 Million in the EU in the last financial year;
- Group 2: Non-EU companies with a net turnover of more than €40 Million in the EU in the last financial year, provided that at least 50% of this net turnover is generated in one or more “high-impact sectors”.
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; and
- Publicly communicate on due diligence.
In addition to introducing due diligence obligations, the proposed Directive requires companies to implement a plan to ensure that their business model and strategy are compatible with the transition to a sustainable economy, including limiting global warming to 1.5°C as per the Paris Agreement goals.
Member states voted a new text in COREPER on 15 March, which was agreed by the EP JURI committee on 19 March.
The final text includes additional compromises to the content of the December 2023 political agreement:
- Thresholds increased: 500 employees/net worldwide turnover of €150 million to 1000 employees and worldwide turnover of €450 million – resulting in reducing by approximately 2/3 the original scope of the proposal;
- Transition plans: Deletion of provisions on the financial incentives for promotion of transition plan implementation (‘through, among others, financial incentives’ for management and board members);
- Financial institutions are still in scope of transition plans requirements. They are still exempted of due diligence requirements for their downstream value chain. Presence of a review clause for assessment of the inclusion of downstream value chain for financial institutions no later than 2 years after entry into force.
Next steps: European Parliament to vote in Plenary on 24 April. A probable corrigendum procedure will require EP & Member States to vote again on the final compromise text after the EU elections.
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.
- 2024:
- CSDDD expected entry into force;
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15 March 2024: Member states voted a new text in COREPER;
- 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”.
- 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.
- The next step for the CSDDD will involve trialogue discussions between the European Parliament, the European Council, and the European Commission, aiming at finalising the text by the end of 2023 or early 2024. When the text is published, it will enter into force 20 days after its publication;
- 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.
The European Parliament, the European Council, and the European Commission are debating the Directive, intending to achieve a finalised text by the end of 2023.
