Corporate Sustainability Due Diligence Directive

Introduction

Directive (EU) 2024/1760, widely known as the Corporate Sustainability Due Diligence Directive (CSDDD), establishes a legal framework requiring large companies to foster sustainable and responsible corporate behavior. The Directive mandates that companies identify, prevent, mitigate, and account for negative human rights and environmental impacts in their own operations, those of their subsidiaries, and within their chains of activities. It harmonizes the fragmented regulatory landscape across the EU regarding corporate due diligence.

Main Goal

The primary objective is to anchor human rights and environmental considerations into companies' operations and corporate governance systems. It aims to ensure that businesses address adverse impacts such as child labour, slavery, pollution, and biodiversity loss, while also contributing to the transition to a sustainable economy.

Who It Applies To

The Directive applies to large EU and non-EU companies based on turnover and employee thresholds:

• EU Companies (Group 1): More than 1,000 employees and a net worldwide turnover of more than EUR 450 million.
• EU Companies (Franchises): Ultimate parent companies of groups with franchising/licensing agreements in the EU (royalties > EUR 22.5 million) and net worldwide turnover > EUR 80 million.
• Non-EU Companies: Companies generating a net turnover of more than EUR 450 million in the Union (or meeting the franchise thresholds within the Union).

Exemptions

• AIFs and UCITS: Alternative Investment Funds and undertakings for collective investment in transferable securities are generally exempt from the due diligence obligations.
• Holding Companies: Ultimate parent companies whose main activity is holding shares may be exempt if a subsidiary is designated to fulfil obligations.

Key Provisions

Obligations & Requirements

1. Due Diligence Policy: Integrate due diligence into all relevant policies and risk management systems, updated every 24 months.
2. Risk Assessment: Map operations and chains of activities to identify actual and potential adverse impacts on human rights and the environment.
3. Prevention and Mitigation: Take appropriate measures to prevent potential adverse impacts and bring actual adverse impacts to an end (e.g., prevention action plans, contractual assurances from business partners, investments in facilities).
4. Stakeholder Engagement: meaningful engagement with affected stakeholders (employees, communities, etc.) during various stages of the due diligence process.
5. Climate Transition Plan: Adopt and put into effect a transition plan for climate change mitigation ensuring the business model is compatible with the transition to a sustainable economy and limiting global warming to 1.5°C (Paris Agreement).
6. Complaints Procedure: Establish a mechanism for persons and entities to submit complaints regarding adverse impacts.
7. Reporting: Publish an annual statement on due diligence implementation (aligned with CSRD reporting where applicable).

Affected Processes and Actors

• Chain of Activities: Includes upstream partners (design, extraction, sourcing, manufacturing) and downstream partners (distribution, transport, storage).
• SMEs: While not directly in scope, SMEs in the supply chains of in-scope companies will be affected via contractual assurances and code of conduct requirements.

Penalties

Member States are required to implement dissuasive penalties for non-compliance:

• Pecuniary Penalties: Maximum limit of not less than 5% of the net worldwide turnover of the company.
• Public Statement: "Naming and shaming" of non-compliant companies.
• Civil Liability: Companies can be held liable for damages caused to natural or legal persons if they intentionally or negligently fail to comply with prevention and mitigation obligations, leading to damage.