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Preliminary agreement on an Corporate Sustainability Due Diligence Directive ("CSDDD")
The European Parliament's stance in June 2023 regarding the draft Corporate Sustainability Due Diligence Directive (CSDDD) paved the way for negotiations with member states. Subsequently, the Council of the European Union and the European Parliament have now reached a provisional agreement on the CSDDD on December 14, 2023.
The EU Corporate Sustainability Due Diligence Directive imposes obligations on certain companies regarding actual and potential negative impacts on human rights and the environment related to their own business activities, those of their subsidiaries, and those of their business partners. The CSDDD aims to enhance due diligence by companies along the entire value chain.
In contrast to the German Supply Chain Due Diligence Act (LkSG), which focuses solely on the upstream value chain, the CSDDD also encompasses parts of the downstream value chain. Austrian companies are currently affected by the German LkSG as suppliers. Extending the obligation to the entire value chain will significantly increase the number of companies indirectly affected by the CSDDD. Certain companies in Austria will also have to directly comply with supply chain legislation in future.
Scope of Corporate Sustainability Due Diligence Directive
According to the preliminary agreement, the scope of application of the CSDDD is to be defined as follows:
- Large EU companies fall within the scope if they have more than 500 employees and generate an annual global net turnover of at least 150 million euros. This applies equally to the ultimate parent company of a large group that meets the specified thresholds on a consolidated basis.
- Companies outside the EU, known as Non-EU companies, fall within the scope if they generate an annual net turnover of at least 150 million euros within the EU. The European Commission is obliged to publish a list of the Non-EU companies affected by the CSDDD. This applies equally to the ultimate parent company of a large group that meets the specified threshold on a consolidated basis.
- Further, EU and Non-EU companies are within the scope if they have more than 250 employees and a global annual net turnover of at least 40 million euros, provided that at least 20 million euros of this turnover is generated in high-risk sectors. High-risk sectors include, among others, the textile industry, agriculture, mineral extraction, and the food sector. The preliminary agreement also envisages the inclusion of the construction sector, although consultations on this matter are still ongoing.
- The financial sector will initially be exempted from the scope of the directive. However, there will be a review clause allowing for future inclusion of the sector based on an impact assessment.
Gradual implementation timeline
The preliminary agreement provides for a gradual application timeline for companies. Assuming that the EU Corporate Sustainability Due Diligence Directive is adopted in 2024, the following timeline is suggested based on current information:
- Three years after the CSDDD comes into effect, starting from 2027, EU companies with more than 1,000 employees and global annual net turnover of at least 300 million euros are obliged to comply. Similarly, the application is envisaged for Non-EU companies with at least 150 million euros in net turnover three years after the directive’s entry into force, provided that the net turnover threshold was exceeded in the financial year preceding the three-year period before the CSDDD's entry into force According to current information, this means that the net turnover must be exceeded in the financial year 2025, thus imposing an obligation on Non-EU companies from 2027 onwards. These companies must report for the first time for the financial year beginning on or after January 1, 2028, in accordance with the CSDDD.
- Four years after the CSDDD comes into effect, starting from the financial year 2028, all other large EU companies that fall within the scope of the CSDDD (more than 500 employees and more than 150 million euros in net turnover), but not meeting the aforementioned thresholds are obliged to comply. The same applies to other Non-EU companies within the scope of the CSDDD (more than 150 million euros in the EU). These companies must report for the first time for the financial year beginning on or after January 1 January, 2029, in accordance with the CSDDD.
- Five years after the CSDDD comes into effect, starting from the financial year 2029, EU and Non-EU companies generating less than EUR 150 million in net turnover but are subject to the scope of the CSDDD due to their activities in high-risk sectors are obliged to comply. These companies must report for the first time for the financial year beginning on or after January 1, 2030, in accordance with the CSDDD.
Additionally, it should be noted that companies falling within the scope of the CSRD (Corporate Sustainability Reporting Directive) are required to report on the scope and structure of their due diligence system earlier according to this directive. Therefore, regardless of the CSDDD, companies must disclose the extent of their corporate due diligence..
Provisions included in the Corporate Sustainability Due Diligence Directive
In addition to the obligations and conventions regarding corporate due diligence, new elements have been added in the appendix of the CSDDD draft. These include the International Covenant on Civil and Political Rights, the International Covenant on Economic, Social and Cultural Rights, as well as the Convention on the Rights of the Child.
Furthermore, it is clarified that the environmental impacts covered, comprise any measurable harm to the environment, such as detrimental changes to the soil, pollution of water or air, harmful emissions, excessive water consumption or other impacts on natural resources. The environmental obligations are complemented by a so-called transition plan for climate mitigation. Companies must define and implement a transition plan to the best of their efforts, ensuring that their business model and strategy are aligned with limiting global warming to 1.5 degrees Celsius.
To support companies, EU Member States are required to provide implementation guidelines through dedicated online portals. Small and medium-sized enterprises, which are also affected as part of the value chain, are to receive special support.
Consequences of Non-Compliance
In comparison to the LkSG in Germany, there are significant differences concerning violations of the CSDDD. Besides companies becoming liable for breaches of due diligence, penalties include the publication of unfair business practices as well as fines of up to 5 % of the company’s annual global turnover. Furthermore, the preliminary draft of the directive provides for civil liability under the CSDDD. Affected individuals, as well as NGOs and trade unions, can assert claims for damages in the event of company violations.
In addition to the aforementioned sanctions, the importance of compliance with the CSDDD is further enhanced, as it can be used as a prerequisite for public contracts and concessions. Companies are encouraged to comply with the provisions of the CSDDD in order to be successful in public procurement tenders.
Next steps towards the CSDDD
In a final step, the preliminary agreement reached on the CSDDD must be formally endorsed and adopted by the Council of the European Union and the European Parliament. The last plenary session of the European Parliament has already been scheduled for April 2024, considering the upcoming European elections in June 2024. In this respect, while the adoption of the directive is generally expected by April, there is already strong resistance from various EU member states, particularly Germany. It remains to be seen whether the EU Supply Chain Regulation can indeed be adopted as planned in the first half of 2024.
Following the agreement at the EU level, the Corporate Sustainability Due Diligence must be implemented into national law within two years.
Implications for companies and action requirements
The agreement reached on the EU CSDDD entails wide-ranging obligations for companies. While the CSRD requires companies to report on their material topics in accordance with legal standards, the CSDDD explicitly calls for action. We therefore recommend that affected companies familiarize themselves with the basic requirements of the EU Supply Chain Regulation and develop an understanding of where the greatest areas for improvement may lie within their company. The further development of the legislation should also be monitored. Additionally, if the CSDDD is indeed adopted, timely implementation of the following topics should be initiated:
- Analyzing and evaluating the impact on sustainability aspects in the own business operations and the value chain
- Establishing a risk management system for sustainability and integrating it into corporate processes
- Creating structures for data collection
The CSDDD is expected to pose considerable challenges for business practices. We recommend addressing these challenges at an early stage, as non-compliance entails not only financial but also considerable reputational risks.
Our team of sustainability experts is happy to help you assess and successfully implement the requirements of the CSDDD.
