On 15 March, the Corporate Sustainability Due Diligence Directive (CSDDD) has been adopted by the European Council after a turbulent procedure in Brussels. On 19 March, the members of the European Parliament’s legal Affairs Committee (JURI) have voted in favour as well. This means that the draft CSDDD now awaits what is hopefully a final hurdle as the next, and if all goes to plan final, vote is scheduled for 24 April 2024. As a result of strong push back mainly on scope and timing, the final text of the Directive has been watered down to meet the objections.
CSDDD: main obligations
The Corporate Sustainability Due Diligence Directive (CSDDD) will require the companies that are in scope to:
- Perform due diligence to identify, on the basis of a risk-based approach, actual and potential human rights adverse impacts and environmental adverse impacts, with respect to their own operations, the operations of their subsidiaries, and the operations carried out by their business partners in companies’ chains of activities – and act upon that accordingly.
- To adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, compatibility of the business model and strategy of the company with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C.
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Scope: the CSDDD applies to very large companies, with phased entry into force based on size
The general thresholds of the proposal have been significantly increased, resulting in a reduction of 30% of the initial number of companies that were expected to fall within scope of the CSDDD. EU companies with at least 1.000 employees (before: 500) and a turnover of at least EUR 450 million (before: EUR 150 million) will be in scope. In addition, the CSDDD will apply to the ultimate parent company of a group that reaches the thresholds of 1.000 employees and a turnover of EUR 450 million and to non-EU companies that reach a turnover of EUR 450 million within the European Union.
The CSDDD has a phased in application. Is the CSDDD will enter in to force later this year, phase 1- companies with more than 5000 employees and EUR 1500 million turnover will be the first group that needs to apply the CSDDD as off 2027. Phase 2 – companies with more than 3000 employees and EUR 900 million turnover will be the second group that needs to apply the CSDDD as off 2028. Phase 3 – companies with more than 1000 employees and EUR 300 million turnover will be the third group that needs to apply the CSDDD as off 2029. Subject to the condition that a subsidiary fulfils the obligations under the CSDDD, ultimate parent holding companies can apply of an exemption. An overview of the relevant thresholds as well as some exemptions of companies that fall outside the scope of the CSDDD, is provided below.
Reduced scope: financial undertakings
For regulated financial undertakings, the due diligence obligations of the CSDDD only apply to their own operations and upstream chain of activities. Reference is nevertheless being made to application of the OECD Guidelines for Multinational Enterprises. Recognising the specificities of financial services is emphasised in the OECD Guidelines in which financial institutions are expected to assess adverse impacts and leverage their influence on companies. Within two years of the CSDDD taking effect it will be reviewed whether the due diligence obligations for regulated financial entities need to be extended. The obligation to adopt a climate transition plan nevertheless applies in full to financial undertakings.Indirect effect on SMEs
A micro, small or a medium-sized undertaking, irrespective of its legal form, and that is not part of a large group is not in scope. However, when the SME has either a commercial agreement related to the operations, products or services of the company in scope or performs business operations related to such operations, products or services, it is affected by the CSDDD. In that case, the company should offer appropriate support to an SME partner, considering its resources and constraints. This may include capacity-building, training, or financial assistance, especially if compliance with the code of conduct or prevention plan would threaten the SME’s viability.
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Important definitions
The due diligence obligations apply to the chain of activities of a company. The ‘chain of activity’ is defined in the CSDDD and means:
The definition of employees is relevant to determine whether a company or ultimate parent is in scope of the CSDDD. There is no definition of employees but there is guidance on how to calculate the number of employees. The number of employees relates to all employees regardless of their location inside or outside the EU. In addition:
- The number of part-time employees shall be calculated on a full-time equivalent basis. Temporary agency workers, and other workers in non-standard forms of employment are also included, if they fulfil the criteria for determining the status of a worker established by the Court of Justice of the European Union. They shall be included in the calculation of the number of employees in the same way as if they were workers employed directly for the same period by the company. Seasonal workers' contribution to the number of employees should be proportional to their months of employment.
- The thresholds for employee count and turnover should encompass branch locations, legally dependent on the head office, as per EU and national laws.
Further guidance on definitions is expected to be published by the European Commission within two year of approval of the CSDDD.
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Climate transition plan
Companies must adopt and put into effect a transition plan for climate change mitigation in line with the Paris Agreement, including its intermediate 2023 and 2025 climate neutrality targets. There is no longer an obligation for a more limited group of larger companies to promote the implementation of the plan through financial incentives. The obligation to adopt a climate transition plan applies to all companies in scope of the CSDDD.
The climate transition plan must include:
- Time-bound targets related to climate change for 2030
- Five year-steps to reach neutrality in 2050 based on conclusive scientific evidence
- Where appropriate, absolute emission reduction targets GHG (scope 1-3)
- Description of decarbonised levers identified and key actions to reach targets
- Explanation and quantification of investments and funding supporting implementation of transition plan
- Description of governance on climate matters, alignment with corporate strategy.
The climate transition plan must be reviewed every 12 months and the undertaking must report on progress made.
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Public support, public procurement and public concessions
The final version of the CSDDD also contains the requirement for Member States to consider the obligations resulting from the CSDDD as implemented into national laws or as part of their voluntary implementation, to become part of the award criteria for public and concession contracts or lay down in relation to the performance of such contracts.
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Civil liability
In addition to public enforcement, the CSDDD includes a civil liability regime. In-scope companies can be held fully liable for damages to natural or legal persons if the following criteria are met:
(i) an intentional or negligent breach of the obligation of Article 7 and 8 CSDDD to prevent, mitigate or end negative impacts;
(ii) the breach caused damage to the natural or legal person’s interest as protected under national law; and
(iii) the right or prohibition as listed in Annex I aims to protect the interests of the natural or legal person.
Companies are not liable for damages caused only by their business partners. Where companies caused or jointly caused an adverse impact, they are jointly and severally liable. The possibility for trade unions and NGOs to bring civil actions is determined by national rules of civil procedure. Importantly, the CSDDD’s civil liability regime does not limit company’s liability under EU or national liability law.
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CSDDD in M&A
Despite the final changes to the scope of the CSDDD, companies need to consider the direct and indirect effects of the CSDDD in transaction processes, including M&A. The mandatory obligations to account for negative impacts in the chain of activities of a company requires companies to conduct thorough M&A due diligence for instance on target companies’ compliance with ESG regulation and particular its CSDDD due diligence obligations and requirement to adopt a climate plan. Tackling this as a priority in the preliminary phase of an M&A process will greatly help both vendor’s and buyers to assess the ESG-readiness of the target or to form a view on potential synergies to be achieved at an early stage.
Similar to the CSRD, the CSDDD obligations take considerable time, money and management attention to implement within an organisation. The M&A target's CSDDD readiness, aside the general ESG regulatory risk assessments, may therefore be of relevance for a proper valuation of the target.
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Next steps
With this milestone, the finish of the European procedure is in sight. If, according to plan, the Parliament adopts the proposal in April, the directive will be published in the Official Journal of the European Union. After that, the national legislation procedures will start. Member states will have two years to transpose the directive into national law, which will probably be in 2026.
We advise companies in scope to anticipate the new rules by conducting a gap and risk analysis against the existing OECD Guidelines. We will be happy to engage with you to discuss your preparations for the CSDDD and related legislation such as the CSRD.
