Corporate Sustainability Due Diligence Directive formally adopted
The Corporate Sustainability Due Diligence Directive (CSDDD) will become EU law following the European Parliament's vote on the final text earlier this year and later approval by EU governments in the Council on 24 May.
Although some consider this new law a watered-down version of the original draft, it still represents a significant advancement in corporate governance and accountability within the European Union. It holds businesses accountable for their societal and environmental impacts and requires them to fully integrate rigorous sustainability and human rights due diligence across their entire business operations.
What is the Corporate Sustainability Due Diligence Directive?
Together with the Corporate Sustainability Reporting Directive (CSRD), the CSDDD aims to enforce rigorous environmental sustainability and human rights standards for businesses in the EU. This includes actively identifying, preventing, mitigating, and accounting for adverse impacts on the environment and human rights throughout their supply chains.
The CSDDD is one of the most rigorous sustainability regulations to date because it holds companies accountable not only for their own activities, but also for those of their suppliers and business partners.
The new directive will apply to EU companies with over 1,000 employees and a net worldwide annual turnover exceeding €450 million, as well as non-EU companies with over €450 million in net turnover generated in the EU during the year before the last financial year. It will be rolled out in phases from 2027 to 2029, starting with larger companies: those with 5,000+ employees and a net turnover of €1,500 million will be required to comply by 2027, followed by companies with 3,000+ employees and a turnover of €900 million by 2028, and finally, those with 1,000+ employees and a turnover of €450 million will be included by 2029.
While it primarily targets the largest companies, the CSDDD is expected to create a ripple effect throughout the economy, compelling organisations not only to scrutinise and enhance their own sustainability and human rights practices, but also to enforce these standards throughout their supply chains.
Context for this regulation
With climate change and human rights violations increasingly in focus, governments face mounting pressure to enforce stricter regulations. This urgency has led to the adoption of legislation like the CSDDD within the EU, which responds decisively to global concerns. It reflects a growing consensus that more than voluntary measures are needed to tackle these challenges effectively.
Differences between the first draft and the current form
The final text of the CSDDD incorporates significant changes from earlier drafts.
Originally proposing a broader application, negotiations refined its scope to focus on the largest EU-based companies. These entities are now required to conduct thorough due diligence and report on sustainability and human rights-related information, including risks and performance, not only within their own operations but also throughout their supply chains.
This adjustment responds to stakeholder feedback during negotiations, striving to achieve a nuanced approach and balance stringent due diligence requirements with practical implementation concerns. By targeting major corporations, the directive aims to minimise burdens on smaller entities while exerting substantial influence throughout supply chains.
What this will mean for corporations
Compliance with the CSDDD will require significant adjustments for large corporations, which are now required to implement comprehensive due diligence mechanisms, conduct regular assessments to identify potential environmental and human rights risks, implement measures to mitigate these risks, and ensure transparent reporting on their activities.
They will also have to develop and implement a transition plan for climate change mitigation that aligns with the Paris Agreement's 2050 climate neutrality goal, along with interim targets specified in the European Climate Law.
Non-compliance can result in substantial penalties, as the enforcement of the new rules will involve administrative oversight and civil liability measures. Member States will be required to appoint an authority to oversee and enforce compliance through issuing injunctions and imposing effective, proportionate, and deterrent penalties, such as fines. They will also have to ensure that affected persons are compensated for damages resulting from deliberate or negligent failures to conduct due diligence.
SMEs are not immune from the impacts
While the directive primarily targets large companies, SMEs will also feel its effects. Large corporations will demand detailed sustainability and human rights information from their suppliers. As suppliers to these larger companies, SMEs will be subject to rigorous scrutiny, requiring them to enhance their own due diligence processes and transparency to meet the expectations set by their clients.
As a result of this trickle-down effect, even SMEs will need to invest in developing systems and practices that comply with the CSDDD. This transition could bring both challenges and opportunities for growth and differentiation, prompting SMEs to embed sustainability more deeply into their operational framework.
Navigating the CSDDD with help from HLB
The CSDDD represents a significant step forward in corporate governance within the EU, setting high standards for environmental and human rights due diligence.
The directive seeks to foster a more sustainable and ethical business environment by imposing rigorous requirements on large corporations and indirectly influencing SMEs. As businesses adapt to these new regulatory demands, they are poised to drive meaningful changes in corporate practices, benefiting both society and the environment.
At HLB Global, we recognise the complexities introduced by the CSDDD for businesses of all sizes. Our team of specialists is dedicated to helping companies navigate these changes by developing and implementing robust due diligence frameworks.
We provide comprehensive support, from initial risk assessment to continuous sustainability reporting and compliance assurance. Our goal is to empower businesses to not only meet CSDDD requirements but also use this directive as a catalyst for improving their sustainability practices and enhancing their reputation.
Get in touch to discover how we can assist your business in navigating the CSDDD.
