On 24 April, in a crucial milestone for responsible business conduct, the European Parliament approved the Corporate Sustainability Due Diligence Directive, also known as the CSDDD.
After countless discussions on the text of the CSDDD, this step represents the culmination of years of effort and work by a range of actors, including legislators from all walks of life, civil society organisations, leading companies, universities and trade unions, reflecting the European Union's commitment to human rights and the environment.
Despite significant concessions in the content of the Directive, forced by some Member States in the legislative process, particularly with regard to the scope of companies covered, it is difficult to overstate the importance of this legislation. We are at a turning point in terms of how, in the future, large companies must conduct their operations and respect the environment and human rights in their activities.
The United Nations Guiding Principles on Business and Human Rights will thus, for the first time, be codified in European Union legislation, thus mirroring a step forward on the road to sustainability and corporate responsibility.
The effects of this Directive will be considerable and not just limited to the largest companies and the EU. With proper implementation and enforcement, it will be possible to prove the impact of the CSDDD and see tangible improvements on the ground.
The CSDDD will apply to the following companies:
- _EU and non-EU companies, including parent companies, with more than 1,000 employees and a turnover of more than 450 million euros,
- _Franchises with a turnover of more than 80 million euros, provided that at least 22.5 million are generated by royalties.
The Directive, in a requirement central to its ratio, obliges companies to integrate human rights and environmental impact considerations into their governance and management systems, requiring them to have in place risk-based due diligence processes regarding actual and potential adverse impacts on human rights and the environment with regard to their own operations, those of their subsidiaries and those carried out by their business partners in their chain of activities, including operations carried out by their upstream and downstream business partners, including supply, production and distribution.
In addition, companies will be obliged to adopt and implement a transition plan to align their business model and operations with the objective of limiting the global temperature increase to 1.5°C, as established in the Paris Agreement. This transition plan should detail the company's specific targets and timeframes for dealing with climate change; describe the strategic measures to achieve these targets; and provide a financial overview, including the investment amounts needed to effectively implement the plan.
Companies that fail to fulfil their due diligence obligations under the Directive will be held accountable and obliged to fully compensate their victims. To this end, Member States will designate a Supervisory Authority in charge of monitoring, investigating and imposing penalties - which may include fines of up to 5 per cent of turnover - on companies that fail to comply with the CSDDD. Foreign companies will be obliged to appoint their Authorised Representative based in the Member State in which they operate, who will communicate with the Supervisory Authorities on due diligence compliance. The European Commission will also establish the European Network of Supervisors to support co-operation between supervisory bodies
In order to ensure its applicability in a realistic and appropriate way to the European business ecosystem, the Directive includes a compliance timeline according to which the new rules will apply:
- _After 2027, to companies with more than 5,000 employees and a turnover of more than 1.5 billion euros;
- _After 2028, to companies with more than 3,000 employees and a turnover of more than 900 million euros;
- _After 2029, to all other companies falling within the scope of the Directive, including companies with more than 1,000 employees and a turnover of more than 450 million euros.
The Directive still has to be formally approved by the Council of the European Union, signed and published in the Official Journal of the European Union, entering into force twenty days after its publication. From this date, Member States have two years to transpose the Directive into their national legislation.
