Translation:

With the adoption of the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D), the European Union has taken another important step toward promoting sustainable and responsible corporate behavior. After intensive negotiations, on 24 April 2024 the European Parliament voted in favor of adopting the CSDDD, with 374 votes in favor and 235 against.

What is the CSDDD?

The CSDDD is a key legislative act aimed at addressing the negative impacts of business activities on the environment and human rights. The directive imposes due diligence obligations on certain companies with regard to respecting human rights and environmental issues. It applies to companies’ own operations, the activities of their subsidiaries, and the so-called “chain of activities” (a compromise term between the value chain and the supply chain), in order to identify issues such as forced labor and environmental harm, both within Europe and beyond.

Who falls within the scope of the CSDDD?

The directive applies to a defined group of companies:

• EU-based companies employing more than 1,000 employees and generating worldwide net turnover exceeding EUR 450 million are directly subject to the CSDDD.

• Non-EU companies that generate at least EUR 450 million in net turnover within the EU are also subject to the CSDDD. In this case, there is no employee threshold.

Originally, the CSDDD was intended to apply to EU companies employing more than 500 employees with global net turnover exceeding EUR 150 million. However, recent compromises revised these thresholds. Although small and medium-sized enterprises (SMEs) are not directly covered by the scope of the CSDDD, they will be indirectly affected. As suppliers to larger companies covered by the directive, SMEs will be required to meet certain standards.

What steps must an organization covered by the CSDDD take to remain compliant?

Under the directive, companies will be required to:

• integrate supply chain due diligence into company policies, management systems, and internal control frameworks;

• identify, assess, and prioritize any actual or potential adverse impacts on the environment and human rights arising from their own operations and their chain of activities. This includes the entire value chain, from raw material extraction to product distribution and storage. To comply, companies must understand both upstream and downstream supply chains (Articles 6 and 6a);

• implement measures to prevent, mitigate, and remediate these impacts;

• establish grievance mechanisms accessible to all participants in the supply chain;

• if covered as a company from a third country, appoint an authorized representative based in the EU;

• publicly report on the organization’s progress in fulfilling supply chain due diligence obligations, including the disclosure of relevant data in the annual report.

Climate transition obligations

Companies must implement a climate change mitigation plan. This means:

• outlining a transition plan aimed at achieving emission reduction targets in line with the Paris Climate Agreement (limiting global warming to 1.5°C).

Stakeholder engagement

Companies must enhance stakeholder engagement, which includes:

• involving relevant stakeholders such as employees, suppliers, local communities, NGOs, whistleblowers, and workers in the value chain to more effectively identify risks and potential impacts. Given the directive’s emphasis on meaningful engagement, companies must ensure that communication with different groups is appropriate—interactive, tailored, and open to feedback.

Enforcement and penalties

The CSDDD will be enforced by national authorities of EU Member States. This means that Member States will determine fines and other sanctions for breaches of national laws implementing the directive.

• Fines may amount to up to 5% of annual global turnover.

Key milestones and timelines

• 23 February 2022: The European Commission adopted the proposal for the Corporate Sustainability Due Diligence Directive.

• 15 March 2024: EU Member States reached a compromise on the final shape of the directive, and the Council of the EU approved the text.

• 24 April 2024: The European Parliament adopted the CSDDD. The final text must still be formally adopted by the Council, after which it will be published in the Official Journal of the EU and enter into force 20 days later—expected at the end of May 2024.

This will trigger a two-year transposition period for Member States to implement the directive into national law.

The CSDDD will be implemented in phases, and the latest compromise gives most companies significantly more time to comply than earlier drafts had anticipated.

Criticism

Although the CSDDD aims to promote sustainability, it has sparked debate and criticism. To reach agreement, the final version of the directive was significantly softened compared to the original proposal.

• Limited scope: Some argue that the thresholds are too high, excluding many smaller companies. Critics believe a broader scope would be more effective in achieving sustainability goals. One of the most contentious issues for some Member States was raising the thresholds to ensure that SMEs would not be directly covered. Estimates suggest that under the new thresholds, around 5,500 companies will fall within the scope—nearly 70% fewer than under the political compromise reached in December.

• High-risk sectors: The original proposal focused on high-risk sectors (e.g., mining, apparel, electronics). This approach was removed as part of the compromise. Critics fear that excluding high-risk sectors weakens the directive’s impact.

• Enforcement mechanisms: Critics point out that without robust enforcement mechanisms, companies may fail to properly fulfill their due diligence obligations.

Positive impacts despite criticism

Despite the criticism, the CSDDD is expected to bring several positive changes:

• Increased corporate accountability: Companies will be more accountable for their environmental and social impacts, leading to improved practices and reduced risk.

• Greater supply chain transparency: The directive will require increased transparency across supply chains, promoting responsible sourcing and production.

By addressing environmental protection and human rights issues, companies contribute to a more sustainable and equitable world. Given the complexity of the new obligations and the far-reaching challenges posed by the CSDDD, the target implementation timeline by 2027 is ambitious. While some companies may be able to respond quickly to the new requirements, most will need to invest significant time and resources to implement and comply with the directive.

Need support?

Contact us. We can help you achieve compliance with the CSDDD by connecting you with our network of partners who provide a wide range of expertise, solutions, and tools tailored to your business needs.

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