CSDDD Update: Official Release of Landmark Regulation

Author

Sergei Makarchuk, LL.M.

Sergei Makarchuk, LL.M.

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Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859  (Corporate Sustainability Due Diligence Directive or CSDDD or CS3D) was published in the EU's Official Journal on 5 July 2024.

The Directive will become effective on 25 July 2024. Member States must incorporate the CSDDD into their national legal systems within two years of that date.

Below we summarize some key facts about CSDDD. Please note that this is a simplified overview and does not purport to provide exhaustive details of the new regulation.

Applicability

CSDDD is applicable to companies that fulfil one of the following criteria:

  1. EU companies with an average of 1,000 employees and a worldwide net turnover of EUR 450 million in the last financial year.
  2. Non-EU companies with a turnover in the EU of EUR 450 million in the year preceding the last financial year.
  3. Ultimate parent companies of groups that meet the above thresholds on a consolidated basis.
  4. For franchising and licensing agreements:
    1. EU companies: Royalties of EUR 22.5 million and a worldwide net turnover of EUR 80 million in the last financial year.
    2. Non-EU companies: Royalties of EUR 22.5 million in the EU and a net turnover in the EU of EUR 80 million in the year preceding the last financial year.

Key obligations

Companies covered by CSDDD now have the following new obligations:

Due diligence obligations

Companies must conduct risk-based due diligence to identify and address adverse impacts on human rights and the environment. This applies to their own operations, those of their subsidiaries and business partners and includes:

  • Incorporating due diligence into the policies and risk management frameworks.
  • Recognizing and evaluating existing or potential negative impacts.
  • Avoiding and reducing potential negative impacts, managing and reducing existing negative impacts.
  • Providing remediation for existing adverse impacts.
  • Engaging with stakeholders.
  • Establishing and maintaining a reporting mechanism and a grievance procedure.
  • Assessing the effectiveness of due diligence measures on an annual basis.
  • Reporting publicly about due diligence matters.

Climate Transition Plan Obligations

In-scope companies must adopt and implement a climate transition plan. This plan should align the company's business model and strategy with a sustainable economy that limits global warming to 1.5°C, in line with the Paris Agreement and the EU's 2030 and 2050 climate neutrality goals. Companies involved in coal, oil, and gas must also address their exposure to these activities. The climate transition plan must include:

  • Targets: Time-bound targets related to climate change for 2030 and in five-year steps up to 2050, based on scientific evidence, including relevant emission reduction targets.
  • Actions: Decarbonization strategies and key actions to achieve these targets, such as changes in products, services and technology adoption.
  • Investments: Explanation and quantification of investments and financing supporting the implementation of the transition plan.
  • Governance: Description of the role of administrative, management, and supervisory bodies in the plan.

Companies reporting a climate transition plan under the relevant articles of Directive 2013/34/EU (i.e. under CSRD) are considered to be in compliance with this obligation. The climate transition plan must be updated annually, detailing the company's progress towards meeting its climate targets.

Enforcement

CSDDD includes measures to ensure effective enforcement through both public and private mechanisms.

Public Enforcement

Each Member State must appoint a respective authority to ensure compliance with CSDDD. Such authorities have the power to:

  • request information and conduct investigations based on their own initiative or complaints from individuals or entities;
  • order companies to stop violations, refrain from repeating the violating conduct, and take appropriate remedial measures;
  • impose administrative fines of up to at least 5% of the company’s worldwide net turnover in the preceding financial year;
  • implement temporary measures to prevent severe and irreparable harm.

Compliance of companies with CSDDD can also be supported by its impact on public procurement since contracting authorities may make compliance with CSDDD part of their qualifying criteria.

Private Enforcement

Companies within the scope of CSDDD may be held liable for damages if they intentionally or negligently fail to comply with their due diligence obligations, resulting in damage to a protected legal interest of a natural or legal person. When a company is held liable, the affected party is entitled to full compensation in accordance with national law. However, this compensation should not result in overcompensation, such as punitive or multiple damages.

Transposition

CSDDD will apply to companies in line with the following timeline:

  • From 26 July 2027:
    • EU companies with more than 5,000 employees on average and a worldwide net turnover of more than EUR 1.5 billion (based on the last financial year preceding 26 July 2027).
    • Non-EU companies with a net turnover in the EU of more than EUR 1.5 billion (based on the financial year preceding the last financial year preceding 26 July 2027).
  • From 26 July 2028:
    • EU companies with more than 3,000 employees on average and a worldwide net turnover of more than EUR 900 million (based on the last financial year preceding 26 July 2028).
    • Non-EU companies with a net turnover in the EU of more than EUR 900 million (based on the financial year preceding the last financial year preceding 26 July 2028).
  • From 26 July 2029:
    • All other in-scope companies.

Conclusion

CSDDD is a significant step towards increasing corporate accountability and sustainability within the EU. The directive aims to ensure that companies operate in an environmentally and socially responsible manner. Companies will need to reconsider and adapt their strategies and activities in order to comply with new standards.