Just when the corporate world was getting a handle on the Corporate Sustainability Due Diligence Directive (CSDDD), the goalposts have moved again. The CSDDD has faced a rollercoaster of revisions over the past two years, but the latest changes have been approved by the European Parliament’s Legal Affairs Committee as of mid-March 2024.
A definitive vote is expected to push the CSDDD into force within the next two months. If there are no delays in the coming weeks, EU member states will have two years to transpose the directive into national laws.
What is the Corporate Sustainability Due Diligence Act?
In short, the CSDDD demands that businesses take responsibility for the impact they have on the world. It focuses on uncovering and addressing issues such as environmental risks, including pollution, habitat destruction and the other impacts of business activities, and human rights and labor abuses. It also makes organizations liable for violations in their supply chains, so even with the most recent changes, many non-covered organizations will still be connected to suppliers, partners or third parties that are subject.
What are the current EU CSDDD requirements?
The revised CSDDD of March 2024 has loosened some of the requirements outlined in the original legislation – however, some sectors, including the financial sector, will be subject to the regulation with few exceptions.
Here's a breakdown of the key changes and important facts you need to know about:
1. The scope of covered companies
- EU companies – Companies within the EU must comply if they have over 1,000 employees and €450 million in global revenue.
- Non-EU companies – Businesses outside of the EU must comply if they generated over €450 million within the EU market per year over the past two years.
- High-risk industries – Higher-risk industries no longer have lower employee number thresholds, though there is the potential for this to be reconsidered later on. High-risk sectors defined under previous iterations of the CSDDD included the manufacturing or wholesale of textiles, leather and related products, agriculture, forestry, fisheries, extractive industries and the food and beverage industry.
2. Altered phase-in periods
Companies will have between three to five years to fully comply with the CSDDD, depending on their size:
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3 years’ phase-in – 5000+ employees and annual turnover of €1,5+ billion per annum
4 years’ phase-in – 3000+ employees and annual turnover of €900+ million per annum
5 years’ phase-in – 1000+ employees and annual turnover of €450+ million per annum
This means the earliest compliance deadlines will begin in 2027. EU Member States will all need to individually incorporate the CSDDD into their national laws.
3. Changed requirements around climate change and product disposal
There is no longer a requirement for organizations to communicate climate transition plans and long-term emissions strategies, or to consider product disposal activities and commitments a part of the directive’s requirements.
What are the consequences of non-compliance with the CSDDD?
The revised CSDDD still has teeth – and companies that fail to comply could face serious repercussions. These consequences include:
Legal liability
In cases of non-compliance, companies can be held liable for damages if their negligence caused harm to people or the environment if their actions (or inaction) cause harm, including when a claim is made by a third party not in scope against an organization in scope of requirements. This means they could face lawsuits and potentially significant compensation payouts. There are limitations on liability if the harm was solely caused by a business partner.
Fines and penalties
EU Member States must designate authorities with the power to enforce the CSDDD. These authorities can impose fines of up to 5% of an organization's net worldwide turnover for violations.
Reputational damage
Organizations that disregard the CSDDD risk tarnishing their reputation with consumers, investors and business partners who increasingly prioritize ethical and sustainable practices. This can lead to a loss of market share and difficulty attracting talent.
Exclusion from public procurement
Businesses in breach of the CSDDD may be barred from participating in lucrative public contracts and tenders.
The severity of the consequences will depend on the specific violation and the national laws of the EU Member State where the case is brought.
The road ahead
The revised CSDDD marks a turning point for its implementation in EU legislation, though it leaves many questions unanswered and the potential for further amendments in the future. While the changes might offer a chance to catch a breath for some – particularly SMEs in low-risk industries – the global landscape demands a proactive approach. It’s worth keeping in mind that extensive third-party liability outlined in the CSDDD is bound to influence broader due diligence and supply chain management, regardless of whether your organization must comply with it directly or not.
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