The Legal Affairs Committee (JURI) of the European Parliament has adopted the final report on the Corporate Sustainability Due Diligence Directive (CSDD). The plenary vote of the European Parliament is scheduled for 1 June 2023.

Objective

The directive aims to strengthen the protection of the environment and human rights in the activities of companies both within the European Union and beyond its borders.

Scope of the directive

The directive will cover both EU-based companies and companies from outside the EU. Pursuant to Article 2, entities from EU Member States subject to the regulation can be divided into two groups:

• Companies that employed an average of more than 500 employees in the last financial year for which financial statements were prepared and whose global net turnover exceeded EUR 150 million;

• Companies employing an average of more than 250 employees and generating global net turnover above EUR 40 million, of which at least 50% came from one or more sectors indicated in the draft directive, such as textile manufacturing, agriculture, forestry, fisheries, or extractive industries.

For non-EU companies, the criterion for being subject to the directive is based on the value of net turnover generated in the EU, regardless of the number of employees. The directive will apply to third-country companies that:

• generated more than EUR 150 million in net turnover in the EU in the financial year preceding the last financial year, or

• generated between EUR 40 million and EUR 150 million in net turnover, of which at least EUR 20 million came from the sectors listed in the draft directive.

If a non-EU company meets the above criteria, it will be subject to the directive regardless of whether it has a branch or a subsidiary in the EU.

What will change

• An obligation to conduct due diligence with regard to respect for human rights and environmental protection will be introduced for specific groups of companies.

• Access to legal protection will increase for individuals who have suffered adverse impacts as a result of companies violating human rights or environmental standards.

• The regulations will cover a company’s own operations, the activities of its subsidiaries, and the so-called “chain of activities” (a compromise term combining “value chain” and “supply chain”).

• The draft directive also includes provisions on liability for breaches of due diligence obligations.

When it will apply

• Three years after the directive enters into force, the rules will apply to the largest EU companies employing more than 1,000 employees and generating net turnover above EUR 300 million annually (for non-EU companies: EUR 300 million in net turnover generated in the EU).

• After four and five years of application, the regulations will be extended to additional groups of companies.

Small and medium-sized enterprises (SMEs)

SMEs will not be directly covered by the regulations; however, the entry into force of the directive will also affect this sector, for example through relationships with larger companies subject to due diligence obligations.

State supervision and sanctions

According to the draft, Member States will be required to implement a range of measures supporting the application of the directive, such as:

• dedicated websites, portals, or information platforms for companies and their supply chain partners,

• support for companies in fulfilling obligations arising from the directive.

Member States will also be required to designate appropriate supervisory authorities, which will be empowered to, among other things:

• initiate investigations ex officio,

• carry out inspections,

• set deadlines for remedying infringements,

• order companies to cease violations and take corrective actions,

• impose financial penalties.

Author: Agnieszka Orłowska (Managing Director at ESG Institute)

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