CSDDD: How Does It Impact My Business?

1.1 WHAT IS THE CORPORATE SUSTAINABILITY DUE DILIGENCE DIRECTIVE ABOUT?

On 24 April 2024, the European Parliament approved the Directive on corporate sustainability due diligence (the Directive). The Council still needs to formally endorse the Directive before it enters into force – this is expected to take place in the coming weeks.

The Directive is an important step in line with the European Green Deal and in delivering on the UN Sustainable Development Goals. The European Commission deemed it essential to have comprehensive mitigation processes for adverse human rights and environmental impacts for companies across all sectors, as their behaviour is key in reaching the aforementioned goals. The Directive will introduce tangible due diligence obligations in order to increase legal clarity and certainty, therefore bolstering a company's sustainability reporting obligations under the Corporate Sustainability Reporting Directive. These due diligence obligations will not be limited to the company's own operations, but will also cover subsidiaries and business partners in their chain of activities.

1.2 WHICH COMPANIES WILL BE IN SCOPE?

The Directive will apply to:

1. large EU-based companies, that have more than 1,000 employees on average and a net worldwide turnover of more than EUR 450 million in the last financial year; and
2. third-country companies with a net turnover of more than EUR 450 million in the European Union in the financial year preceding the last financial year.

However, two important measures have been included to prevent circumvention of the Directive:

1. if a company has entered into a franchise or license agreement, the Directive will be applicable, as soon as royalties amount to EUR 22.5 million or more and the company has a net turnover of more than EUR 80 million in the European Union
2. thresholds will have to be calculated at group level, based on the consolidated annual accounts in the European Union.

Moreover, the Directive includes the possibility to exclude a holding company from any due diligence obligations if its main activity is the holding of shares in operational subsidiaries, and only if one of its subsidiaries fulfils all obligations under the Directive on behalf of the holding company. For that purpose, an application needs to be submitted to the competent supervisory authority of the holding company. Joint liability for both the holding company and the concerned subsidiary is foreseen in case of failure to comply with the obligations.

1.3 WHICH OBLIGATIONS WILL IN-SCOPE COMPANIES HAVE?

The Directive will establish a risk-based due diligence process to assess and, if necessary, mitigate the impact of the activities of the company on human rights and the environment. Furthermore, the Directive introduces provisions on liability, as well as an obligation to adopt a climate change mitigation plan. Based on that framework, the following elements should be present in the due diligence process of a company:

1. Policies and risk management systems: human rights and environmental due diligence will have to be incorporated in the corporate policies, together with a specific due diligence policy. A biannual update is required, as well as an update after any occurrence of a substantial change.
2. Identification and assessment of impact: companies will have to take appropriate measures to identify and assess actual and potential adverse impacts arising from their own activities, those of their subsidiaries and of their business partners.
3. Prevention, mitigation, minimisation and termination: if potential adverse impacts are identified, companies should take appropriate measures to prevent, or where prevention is impossible or not immediately possible, adequately mitigate the potential adverse impacts.
   
   1. When adverse impacts have occurred, appropriate measures should be taken to bring them to an end or if not possible, minimise the extent of the impact.
   2. Companies are required to put a prevention action plan in place and to try to obtain contractual guarantees from business partners, with regard to compliance with the code of conduct and prevention action plan of the company. If adverse impacts have occurred, companies may, as a last resort suspend or terminate the existing relations with a business partner, if the governing law allows them to do so.
4. Remediation: if an adverse impact has occurred as a result of the activities of the company, the company should remediate this adverse impact. Remediation is also deemed voluntary if the adverse impact is caused by a business partner.
5. Notification mechanism and complaints procedure: affected persons, trade unions or other workers' representatives and civil society organisations will have the possibility to submit complaints where they have legitimate concerns regarding adverse impacts to the company. Alongside the complaints procedure, a notification mechanism should enable persons and organisations to submit information or concerns regarding adverse impacts.
6. Monitoring: companies will be required to carry out periodic assessments of their own operations and measures, those of their subsidiaries and those of their business partners, to monitor the adequacy and the effectiveness of the aforementioned obligations.
7. Communication and publication: an annual statement on all of these obligations needs to be published on the website of the companies falling within the scope of the Directive.
8. Environmental plan: companies ought to implement a strategy to align their business model and approach to ensure compatibility with the shift towards a sustainable economy, taking into account the objective to limit global warming to 1.5°C as outlined by the Paris Agreement. Companies should include emission reduction objectives in their plan, in case climate is – or should have been identified as – a principal risk for, or a principal impact of, a company's operations.

The engagement of stakeholders shall be required by companies in order to obtain the necessary information to properly fulfil all of these obligations.

1.4 WHAT ARE THE POTENTIAL SANCTIONS?

The Directive outlines a limited number of sanctions that should apply in all Member States, but leaves it to the Member States to ensure a proportionate enforcement process, in line with their domestic law. Member States will therefore have to lay down rules on civil liability of companies for damage arising from their intentional or negligent failure to comply with the due diligence process, resulting in an adverse impact, that should have been identified, prevented, mitigated or brought to an end. However, companies cannot be held liable if the damage was caused solely by an upstream or downstream business partner. Furthermore, where damage is caused jointly by a company and its subsidiary or business partner, they should be held jointly and severally liable in accordance with the applicable national requirements.

In addition to civil liability, Member States will have to anticipate rules on the sanctions applicable to infringements of the obligations, as implemented in national law. Pecuniary penalties and publication obligations will in any case be two possible sanctions.

1.5 WHAT ARE THE RISKS FOR DIRECTORS?

Originally, the (proposed) Directive also introduced specific directors' duties. As part of their duty of care, directors of in-scope companies were obliged to take into account the consequences of their decisions on sustainability matters in the short, medium and long term. In addition, directors were charged with putting in place and overseeing the due diligence actions and due diligence policy of the company.

Further negotiations between the EU institutions led to a removal of said obligations due to concerns about inappropriate interference with relevant national law. It follows that for the time being, directors bear no risk of automatic personal liability for corporate sustainability due diligence.

However, liability of the company for breaching its due diligence obligations may still indirectly result in directors' liability in accordance with relevant national law. As concerns Belgium, directors could be held liable both internally (by the company) and externally (by third parties) when they fail to exercise due care in the sustainability policy. When such lack of care is considered as a failure to perform their duties, directors can be held liable by the shareholders of the company. Moreover, when the lack of care is considered as a tort, a director can also be held liable by consumers, other companies or any other interested party affected by a careless sustainability policy. In order for a liability claim to succeed, actual damage and a causal link to the alleged failure of the director will in any case have to be demonstrated.

In this context, directors should check whether and to what extent liability risks related to sustainability matters are covered by their D&O insurance policy.

1.6 WHAT'S NEXT?

Once approved by the Council, the Directive will enter into force on the twentieth day following its publication in the EU Official Journal. The obligations must be implemented in national law within two years after the entry into force of the Directive. However, the obligations will only gradually apply as follows:

Companies within the scope of the Directive should already prepare themselves to ensure that they meet its upcoming legal requirements, by including processes for appropriate auditing of their supply chain and by implementing risk-based, robust and effective supply chain due diligence practices to mitigate potential risks before they arise. Companies that are not in scope of the Directive may still be impacted through their business relationships. Negotiations on contractual provisions to ensure compliance with the Directive's requirements may then be necessary, such as a contractual obligation on a business partner to provide the necessary information about its own sustainability policy in due time or to proactively report about compliance with its own sustainability due diligence obligations.

Our multidisciplinary ESG team at Lydian will be happy to assist you with any questions in relation to these new legal requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.