The Corporate Sustainability Due Diligence Directive – latest changes and key obligations
Almost four years after it was first announced, the Corporate Sustainability Due Diligence Directive (the Directive) has made it over the finish line. That is no small feat. Human rights due diligence is still a novel concept, and its manifestation as a mandatory legal principle that can lead to civil liability and administrative sanctions even more so. However, the largest trading block on earth has now made it a centerpiece of corporate sustainability efforts for large EU and non-EU based companies. In this article we set out the latest changes in the final text of the Directive and, equally important, discuss which key obligations remain.
Higher thresholds and delayed entry into force
Those who followed the recent developments will be aware that last minute representations from Germany, France and Italy led to significant amendments to the compromise agreed between the European Council and European Parliament in December 2023. These include:
Higher threshold: Companies with 1,000 employees and a turnover of EUR450 million are in scope. This is a significant increase from the scope agreed in December 2023 of 500 employees and a EUR150 million turnover. Moreover, the concept of high risk sectors with lower thresholds has been completely abandoned.
Entry into force: The Directive will enter into force in three different phases:
- in three years for companies with 5,000 employees and EUR1.5 billion turnover;
- in four years for companies with 3,000 employees and EUR900 million turnover;
- in five years for companies with 1,000 employees and EUR440 million turnover.
Significant obligations remain
Focusing on the recent last minute amendments in the final compromise, commentaries so far have paid less attention to the fact that far-reaching elements of the original proposal have survived.
Extraterritorial application: Despite strong criticism in the US and China, key trade partners of the EU, the Directive still applies to large non-EU companies which have a net turnover of more than EUR450 million within the EU.
Climate Transition Plans: Companies in scope are still obliged to adopt and put into effect a transition plan for climate change mitigation. Such plan should aim to ensure that the business model and strategy of the company are compatible with the limiting of global warming to 1.5ºC, in line with the Paris Agreement, and the objective of achieving climate neutrality in the “European Climate Law” (regulation EU 2021/1119). If anything, this provision is more demanding compared to the initial Commission Proposal, with strong language on time-bound and science-based targets, and the requirement to identify decarbonization levers and plan key actions.
Chain of Activities: The scope of the due diligence obligations under the Directive had been a hotly contested issue from the start, with the European Commission, European Council and European Parliament taking fundamentally different positions. Perhaps surprisingly, the definition still refers to both upstream and downstream activities (with the exclusion of waste disposal) and to direct and indirect business partners. A clear win for advocates of more far-reaching due diligence obligations.
Civil Liability: There is no doubt the final text obliges Member States to ensure companies can be held liable under civil law and ordered to pay full compensation. Again a strongly debated issue from the outset, the civil liability provision has survived in no unequivocal terms.
There is much more to unpack, and we will be doing so at an in-person breakfast seminar which will take place in our London office on 11 April at 09:00 BST. To register your interest in attending, please email Amy Gatenby.
