EU’s Corporate Sustainability Due Diligence Directive: A game-changer for global business

The EU is leading the charge toward a sustainable future, and its environmental policies are a testament to its unwavering commitment. On 24 May 2024 the Council of the European Union approved the Corporate Sustainability Due Diligence Directive (CSDDD). The directive is expected to enter into force in July 2024. This is a landmark directive aimed at fostering sustainable and responsible corporate behaviour in companies’ operations and across the global value chains.

 

Your business and the CSDDD: Understanding the obligations

The CSDDD introduces requirements for companies to identify and prevent, mitigate, or cease the potential or current impacts of their operations on the environment and on human rights breaches. The companies would be obliged to conduct due diligence not only on their own activities and operations but also on the activity of all entities directly and indirectly affiliated with their value chains. So businesses will have to develop and execute comprehensive “prevention action plans” to mitigate potential risks. These plans will also mean obtaining contractual assurances from their direct business partners regarding compliance and establishing mechanisms to verify that they adhere to these standards. Additionally, the directive mandates that large companies adopt and implement a climate change mitigation plan aligned with the EU’s ambitious commitment to climate neutrality by 2050 and an intermediate target of at least a 55% reduction in emissions by 2030, as enshrined in Regulation 2021/1119.

 

The CSDDD’s target: Companies under scrutiny

• Large EU limited liability companies and partnerships: Companies with more than 1,000 employees on average and with a net worldwide turnover of more than EUR450 million in the last financial. For companies having entered into franchising or licensing agreements with over EUR80 million turnover in the EU and EUR22.5 million in royalties.
• Large non-EU companies: Companies with a net worldwide turnover of more than EUR450 million in the EU in the financial year preceding the last financial year.
• Small and Medium-Sized Enterprises (SMEs): Micro companies and SMEs are not covered in the directive. But, supporting, and protective measures for SMEs are provided, as part of the value chains of larger companies.

 

Phased implementation: A timeline for compliance

The CSDDD will be implemented in phases, starting with a two-year transposition into national law by Member States as follows:

• Three-year period for companies with over 5,000 employees and EUR1,500 million turnover (from 2027).
• Four-year period for companies with over 3,000 employees EUR900 million turnover (from 2028).
• Five-year period for Large EU limited liability companies and partnerships and Large franchisees and licensees (from 2029).

 

The financial sector: A tailored approach

Under the scope of the Directive the financial sector won’t have the same due diligence obligations as the other sectors. Recital 26 and Article 3 exclude downstream services provided by business partners from the definition of “value chains” or “chains of activity”. Consequently, service providers, including financial institutions, have no due diligence obligations regarding their downstream market. It’s worth noting that the Commission retains the authority to extend the CSDDD’s due diligence obligations to the financial service sector within two years of the directive’s implementation.

 

Enforcement and penalties: Ensuring compliance

While directors of EU companies would bear the responsibility of overseeing due diligence requirements, each Member State will appoint a dedicated authority to oversee and enforce these rules. The authority will have the power to issue orders to stop violations and impose penalties that are effective, proportionate, and discourage future non-compliance, especially through fines. At the EU level, the Commission will establish a network connecting these national authorities to ensure consistent enforcement across all Member States.

 

Taking action: Preparing for a sustainable future

The CSDDD presents an opportunity for international corporates to not only comply but also lead the way in sustainable and ethical business operations. By proactively reviewing your current practices and aligning them with the directive’s principles, you can mitigate risks, demonstrate your commitment to sustainability, and gain a commercial competitive edge as any non-compliance will now incur significant costs, in both money and time. And the reputational risks of non-compliance should not be underestimated.