EU Corporate Sustainability Due Diligence Directive (CSDDD)

The European Union (EU) has always been at the forefront of promoting corporate responsibility and sustainability. Continuing this trend, the EU parliament approved the Corporate Sustainability Due Diligence Directive (CSDDD) on 24 April 2024. The Directive ensures that companies take proactive measures to respect human rights and mitigate environmental impacts within their operations and supply chains.

What is the CSDD Directive?

The CSDD Directive, or CSDDD, is a legislation designed to enforce respect for human rights and the environment throughout businesses' supply chains. Although several EU member countries have due diligence legislation in place, these laws are typically voluntary, often sector-specific, or only address single aspects such as child labour. The CSDD Directive aims to bring a more comprehensive and mandatory approach to sustainability reporting.

Who falls under the scope of the CSDDD?

The financial sector has been excluded from CSDDD (for now, at least), despite being included in the existing sectoral OECD guidance. The CSDDD will directly apply to both EU and non-EU companies.

The Directive applies to EU-based companies with over 500 employees and a turnover exceeding €150M. Alternatively, companies with over 250 employees and a €40M turnover also fall under the Directive, provided that 50% of their revenue comes from high-risk industries like fashion, minerals, or agriculture.

Non-EU companies operating within the EU also fall under the scope of the CSDDD. This includes third-country companies active in the EU that meet the turnover thresholds aligned with the groups mentioned above, with the revenue being generated in the EU, irrespective of whether they have a branch or subsidiary in the region.

The financial sector has been excluded from CSDDD (for now, at least), despite being included in the existing sectoral OECD guidance.

The EU expects the Directive to directly impact around 13,000 companies within the EU and approximately 4,000 outside the EU.

What will companies need to do?

The CSDD Directive mandates that companies falling under its scope:

1. Identify the principal adverse impact on the environment and human rights resulting from their operations, subsidiaries, and supply chains.
2. Mitigate identified risks within their operations and supply chain, supported by an action plan and a timeline to address the identified risks.
3. Establish grievance mechanisms for workers and stakeholders to raise issues if they arise.
4. Align their business model and strategy with the 1.5°C target of the Paris Agreement, specifically for large companies.
5. Publicly report on their due diligence via a sustainability report or website.

What's next?

The EU Member States approved the CSDDD on 24 May 2024. 

This vote concludes a four-year process of negotiations and debates, marking a major political breakthrough and a turning point for human rights and environmental due diligence. 

Once formally adopted, the CSDDD will be ready for publication in the EU Official Journal, and then Member States will have two years to transpose the CSDDD into domestic law. Previously, it was anticipated that the requirements would begin to apply to the most prominent companies by 2027 and be phased in for additional companies in the subsequent two years (2028 & 2029). However, the voting delays will likely extend this timeline.

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