After much deliberation, members of the European Parliament approved the Corporate Sustainability Due Diligence Directive (CSDDD) legislation on April 24, 2024. Approval is a big step toward establishing sustainable and responsible business practices concerning the environment and human rights.
The CSDDD creates a legal liability for organizations relating to human rights and environmental violations within their operations and supply chain. In order to reach an agreement, the terms of the CSDDD were significantly reduced from terms from the initial proposal.
It’s unclear what obligations the CSDDD may impose on asset managers and private equity and credit firms, but investors and lenders will likely want to factor CSDDD risks into their due diligence and risk monitoring workflows considering the scale of penalties involved.
Let's explore what the CSDDD does, and organizations it will impact.
What is the CSDDD?
CSDDD — or CS3D — is a regulation that establishes due diligence standards for organizations that are operating in the European Union (EU). This directive must be agreed upon with the council, and it requires companies (and their partners) to prevent, end or mitigate their negative impact on the environment, climate change, and human rights. Some of the rules and regulations are mandatory for organizations to follow. For details, here’s the final draft of CSDDD.
What companies are impacted by the CSDDD?
The law applies to EU companies with more than 1000 employees and a worldwide turnover of 450 million euros. It also includes companies that are franchising or operating in the EU and have the same turnover and employees. These organizations will have to integrate these due diligence policies by making related investments and improving business plans in order to comply with the new obligations.
When will it be applicable?
The CSDDD will be phased over the timeline of five years.
Companies with a turnover of 1,500 million euros and 5,000 employees will be impacted in 2027.
Companies with a turnover of 900 million euros and 3,000 employees will be affected in 2028.
Companies with a turnover of 450 million euros and 1,000 employees will be impacted in 2029.
Also, lower turnover and employee thresholds apply to companies that rely on license models or franchises. Below is the data for those companies:
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How to comply with CSDDD?
The member states will provide companies with detailed online information on their obligations and how to comply via practical portals that contain the commission's guidance. They will also designate a supervisory authority to investigate and impose penalties on the organizations that are not complying. Non-complying companies will face fines of up to 5% of the company’s net worldwide turnover, exclusion from public tenders, and other penalties.
Some examples of mandatory regulations that companies have to follow include:
Climate transition plans
Integrate human rights and environmental policies
Identify adverse sustainable policies
Prevent adverse impacts
Do more than rely on contractual assurances required
Next steps?
The CSDDD is likely to enter into force during Q3 2024. The member states have two years to transpose the new rules into their national laws, and requirements will start to apply to companies four or five years after entry into force, according to the company size.
Additional resources and news on the CSDDD
- Due diligence: MEPs adopt rules for firms on human rights and environment (European Parliament)
- EU Parliament Adopts Environmental, Human Rights Sustainability Due Diligence Law (ESG Today)
- EU Parliament Approves Supply Chain Law (HRW)
- European Parliament Approves Corporate Sustainability Due Diligence Law (Forbes)
- EU Adopts Mandatory Rules on Corporate Sustainability Due Diligence That Will Apply to Many US Companies (Lexology)
