Navigating the Green Maze: Unravelling the EU’s Corporate Sustainability Due Diligence Directive

In the first part of our corporate sustainability series, we looked at the Corporate Sustainability Reporting Directive (the “CSRD”) and its impact, to whom it applies, what in-scope businesses need to do in preparation for it and what are the ongoing compliance obligations.

In part two of our corporate sustainability series, we will look at the Corporate Sustainability Due Diligence Directive (the “CSDDD”). The CSDDD is one of a number of measures which have been conceived as a way to promote greater knowledge on the environmental and human rights impact of the operations of companies and to foster sustainable and responsible corporate behaviour in companies’ operations both up and down the supply chain.

Introduction

On 24 May 2024, the Council of the European Union formally adopted the CSDDD. The directive was entered into force on 3 July 2024 (being 20 days after its publication in the Official Journal of the European Union) and Member States will have two years to transpose the CSDDD into national legislation and communicate relevant texts to the European Commission.

This ambitious new legislation marks a significant step towards promoting sustainable and ethical practices among EU-based companies and non-EU-based companies operating within the EU. The CSDDD forms part of a wider sustainability-based legislative framework by the Council of the European Union (such as the European Green Deal, CSRD, among others) and aligns with the United Nation’s 2030 Agenda for Sustainable Development.

Timeline and Scope of Application

The CSDDD will be implemented on a phased basis depending on a company’s size and turnover. These timelines are set out below.

Phase 1: In respect of EU companies with a net worldwide turnover of €1.5 billion or more and 5,000 employees, and non-EU companies with a net worldwide turnover of €1.5 billion generated within the EU in the year preceding their last financial year, the implementation date will be the end of 2027.

Phase 2: In respect of EU companies with a net worldwide turnover of €900 million or more and more than 3,000 employees, and non-EU companies with a net worldwide turnover of €900 million generated in the EU in the year preceding their last financial year, the implementation date will be the end of 2028.

Phase 3: In respect of EU companies with a net worldwide turnover of €450 million or more and over 1,000 employees, and non-EU companies with a net worldwide turnover of €450 million generated within the EU in the year preceding their last financial year, the implementation date will be the end of 2029.

Although micro-companies and small and medium-sized enterprises (“SMEs”) do not fall directly within the scope of the CSDDD, they could be indirectly affected by virtue of the fact that they are business partners with in-scope companies in value chains. The CSDDD will provide supporting and protective measures for micro-companies and SMEs in this regard.

Obligations of in-scope companies

The CSDDD aims to ensure that any company operating in the European market contributes to the sustainable transition of economies and societies. The obligations of these companies under the CSDDD are highlighted below:

1. Duty to conduct due diligence: The main concept of the CSDDD is due diligence. In-scope companies are required to perform an internal due diligence exercise and, based on the results, take any appropriate measures to prevent, mitigate, and/or reduce the potential or actual adverse impacts on human rights (being defined as an impact resulting from an abuse of selected rights enshrined in a non-exhaustive list of international instruments) and environmental matters (being defined as an impact resulting from the breach of a list of international environmental obligations including water or air pollution, harmful emissions, and excessive water consumption) in respect of the company’s own operations, its subsidiaries operations or those in its value chain.
   
   
2. Transition plan for climate change mitigation: Presenting as a valuable tool to ensure corporate transition to a sustainable economy, the CSDDD calls for certain large companies to develop, enforce, and disclose a plan for climate change mitigation. The plan must, through its best efforts, ensure that the business model and strategy of the company are compatible with the United Nations Paris Agreement target of limiting global warming to 1.5 degrees by 2050. The plan must tackle the exposure of the company to coal-, oil-, and gas-related activities. Companies are expected to conduct assessments of the plan every 12 months to evaluate its progress and update it where relevant. The requirement to adopt a climate change mitigation plan is an obligation of means, rather than an obligation of results (i.e., companies are expected to put in place policies, but are not expected to guarantee that adverse impacts will never occur again). It follows from this provision that national supervisory authorities must supervise the drafting and adoption of such plans, but not their effective enforcement.
   
   
3. Notification mechanism: Companies within the scope of the CSDDD are required to put in place an accessible mechanism for individuals and organisations to submit information or concerns regarding actual or potential adverse impacts of the company’s operations.
   
   
4. Complaints procedure: Organisations subject to the CSDDD are required to establish a complaints procedure to deal with complaints from individuals that reasonably believe they have been adversely affected as a result of the company’s operations or that of its value chain. Such procedures must be fair, publicly accessible, predictable, and transparent. Additionally, the relevant workers, trade unions, and other workers’ representatives must be informed of the procedures existence.
   
   
5. Monitoring the effectiveness of the taken measures: Companies which are in-scope of the CSDDD are instructed to monitor the implementation and effectiveness of their due diligence policies by conducting periodic assessments of their operations, those of their subsidiaries and, (where related to the value chains of the company) those of their business partners.
   
   
6. Communication and reporting requirements: In-scope companies are expected to be transparent about their sustainability practices and publicly disclose their due diligence processes, i.e., report on their efforts to identify and address human rights, environmental, and governance issues. This includes disclosing information about the findings and outcomes of those measures.
   

Enforcement

The CSDDD provides for two complementary enforcement mechanisms, namely administrative supervision, and civil liability.

1. Administrative supervision: The CSDDD establishes a ‘European Network of Supervisory Authorities’ which is tasked with ensuring collaboration and cooperation between national supervisory authorities. National supervisory authorities, designated by the Member States, will ensure that in-scope companies comply with their due diligence obligations. Third-country companies will be supervised by the national supervisory authority of the country which they have a branch or where they generate most of their net turnover within the EU. In that regard, the national supervisory authorities have the power to launch inspections and investigations on their own initiative or following substantiated concerns communicated to them.
   
   
2. Civil liability: The CSDDD provides for companies to be held liable for any damage caused (either intentionally or negligently) by their failure to comply with their obligations under the CSDDD and to fully compensate those who suffered damage because of this failure. Claimants will also be entitled to seek injunctive measures to cease established infringements. A claimant must establish the following four elements are present for an action of civil liability to be proved:

a) there was breach of a duty by an entity;
b) damage was caused to a natural or legal person;
c) there is a causal link between the breach of the duty and the damage suffered; and
d) the entity intentionally or negligently failed to prevent, mitigate, or bring an end to potential or actual adverse impacts.

A limitation period for bringing such claim by those concerned by adverse impacts is 5 years.

Penalties

In-scope companies that fail to comply with their CSDDD obligations may face sanctions from their national supervisory authorities, including maximum fines of not less than 5% of the company’s net worldwide turnover. Where a sanctioned company fails to comply with an imposed sanction within the applicable period, the national supervisory authority is required by the CSDDD to publish the name of the relevant company and the nature of the sanction.

Conclusion

The CSDDD serves a distinct but complementary purpose to the already established CSRD. While the CSRD focuses on transparency, accountability, and sustainable practices, the CSDDD aims to ensure that strict environmental and human rights standards are upheld across companies operating within the EU.

It is noteworthy that the reporting requirements of climate mitigation plans under the CSDDD are aligned with those of the CSRD. Therefore, companies within the scope of both the CSDDD and the CSRD do not have to double report their plans.

For more information and guidance on CSDDD and how your business may be affected, please contact a member of our Corporate and Commercial team.