After the Corporate Sustainability Reporting Directive (CSRD) in 2022, the EU has now also enacted a second directive aiming at improving the ESG and corporate social responsibility of companies active within the EU. The CSDDD was approved by EU Parliament on 24 April 2024 and by the EU Council on 24 May 2024. It will enter into force 20 days after its publication in the Official Journal and member states will have two years from this date to transpose its provisions into national law.
While the CSRD focused on reporting duties for companies to increase the transparency of their ESG impacts for investors, consumers, policymakers and other stakeholders, the CSDDD requires more active due diligence actions of companies in order to assess human rights risks and environmental risks in their value chain and to take the necessary action to remedy these risks. Therefore, it is safe to say that this new directive takes the corporate social responsibilities of companies operating within the EU another step further. In order to get the Directive approved, its scope of application was narrowed down to EU companies employing at least 1,000 employees with an annual turnover exceeding 450 million euros, as well as non-EU companies operating within the EU which meet similar thresholds. Originally, the thresholds were 500 employees and a turnover of 150 million euros, but these were deemed too low to convince enough member states to approve the proposal. Nonetheless, the CSDDD is still estimated to apply to over 5,000 companies and is welcomed by NGO's and human rights organisations.
The CSDDD imposes a duty on companies to identify and assess adverse impacts on human rights and the environment. This includes an obligation to map their operations, supply chains and business operations. It is clear that their legal responsibility will no longer be limited to their own legal entities. In case risks are identified, the companies will need to take action to prevent or mitigate these risks. This can e.g. be done by creating strong policies or compliance procedures. They also need to be transparent about their due diligence efforts (the CSDDD mandates regular reporting and monitoring) and can be held accountable. Companies must also engage with relevant stakeholders and create an effective remediation procedure in case a negative impacts occurs (where affected individuals or communities can file grievances in order to find a solution/remediation).
On top of the due diligence process, the CSDDD also requires companies to adopt transition plans for climate change mitigation. This means that these companies will need to design and execute internal plans to limit their climate impact.
The Directive imposes means-based obligations (not result-based), this means that the companies will need to provide their best efforts to comply and prevent negative impacts, but they are not expected to guarantee that there will not be any negative impact.
EU member states will have to appoint national supervisory authorities who will need to oversee the compliance. Companies that are not in line with the requirements of the Directive might face financial fines up to 5% of their global turnover. In addition, the company has a civil liability for damages caused by the non-compliance with the directive. A final sanction entails the possible exclusion from public tenders and procurement processes within the EU.
After the implementation of the Directive in 2026, there will be a phased actual implementation for companies based on their size:
- 2027: + 5000 employees and turnover exceeding 1.5 billion euros;
- 2028: + 3,000 employees and turnover exceeding 900 million euros;
- 2029: + 1,000 employees and turnover exceeding 450 million euros.
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