Background to the CSDDD

The proposal for a Corporate Sustainability Due Diligence Directive (CSDDD) was originally published by the European Commission in 2022. In December 2023, the Council of the EU and the European Parliament reached provisional agreement on the CSDDD however, following concerns raised by a number of Member States, significant amendments were made to the draft text.  Last week, the Council endorsed the compromise text which now must be formally adopted by the Council and Parliament before it can enter into force. 

The proposed CSDDD will:

• impose due diligence obligations on large companies regarding actual and potential adverse impacts on human rights and the environment with respect to their own operations, those of their subsidiaries and those carried out by their business partners; and
• require large companies to adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, compatibility of the business model and strategy of the company with the transition to a sustainable economy and with the limiting of global warming to 1.5°C (Climate Transition Plan).

Changes Made to the Text

Key changes made to the text include the following:

Companies in scope:

In the updated compromise text, the employee/turnover threshold criteria have been increased in order to reduce the number of companies that will fall within scope and a new in-scope category has been introduced relating to the existence of certain franchising or licensing agreements (as detailed below).  In-scope companies now include:

• EU companies with a minimum of 1,000 employees (previously 500 employees) and a net worldwide turnover of a minimum of EUR450 million (previously EUR150 million).
• Non-EU companies with a turnover in the EU of a minimum of EUR450 million (previously EUR150 million).
• Ultimate parent companies (EU or non-EU) of a group where the group reaches the above thresholds even where the ultimate parent companies do not themselves meet the above thresholds.
• Companies (EU or non-EU) that enter into (or are the ultimate parent companies of a group that enters into) franchising or licensing agreements in the EU in return for royalties with independent third-party companies, where these agreements meet certain criteria and where the royalties amount to more than EUR22.5 million and the companies have (or are the ultimate parent companies of a group that has) a net worldwide turnover (for EU companies) or EU turnover (for non-EU companies) of more than EUR80 million.

Companies must meet the turnover/employee/franchising/licencing requirements (as applicable) in two consecutive financial years in order for the CSDDD to apply.  

High-risk sectors:

It had been proposed that the CSDDD would apply to companies generating significant turnover in a “high-risk sector”.  The high-risk sector approach has now been deleted however may be revisited in the future.

Exemption for non-operational parent companies:

Where an ultimate parent company has as its main activity the holding of shares in operational subsidiaries and does not engage in taking management, operational or financial decisions affecting the group or its subsidiaries, it may be exempt from the CSDDD subject to one of its operational subsidiaries established in the EU fulfilling certain obligations.  The ultimate parent company will need to apply for an exemption from the relevant competent supervisory authority and will remain jointly liable with the subsidiary for any failure to comply with these obligations.

Climate Transition Plans:

The CSDDD requires in-scope companies to adopt and put into effect a Climate Transition Plan.  The plan must be updated every 12 months and must contain a description of the progress made by the company in achieving the targets set out in its plan.

It had previously been proposed that Climate Transition Plans should be duly taken into account when setting directors’ variable remuneration.  This provision has been deleted from the compromise text.

Directors’ duties:

The original CSDDD proposal provided for harmonised duties for directors to take into account sustainability matters in their decision making in addition to responsibility for setting up and overseeing due diligence.  These provisions have now been removed.

Financial sector:

Regulated financial undertakings will be in-scope with regard to their own operations, those of their subsidiaries and their upstream operations in addition to the obligations regarding Climate Transition Plans.  The joint EU Council – Parliament political statement (agreed post-trilogues) on the need to develop appropriate sustainability due diligence requirements for regulated financial undertakings regarding the activities of, among others, their clients has been withdrawn.  The Commission is to submit a report, no later than two years after the CSDDD enters into force, to the Parliament and Council on whether such requirements are needed.

Civil liability:

Provisions on civil liability now give more flexibility to Member States.

Other Provisions of Note

In-scope companies which are not subject to reporting requirements under the Corporate Sustainability Reporting Directive will be required to publish an annual statement on their website reporting on the matters covered by the CSDDD.  The content and criteria for this statement will be set out in separate delegated acts published by the Commission.

Non-EU companies will be required to appoint a legal or natural person as an authorised representative in the EU to act as a point of contact for the relevant supervisory authority and to receive communications regarding compliance with and enforcement of the CSDDD.

Member States will be obliged to provide for penalties for infringements of the CSDDD and rules governing the civil liability of companies for damages due to adverse impacts that could have been identified, prevented, mitigated, brought to an end or their extent minimised through appropriate measures.

The Commission is to issue guidance covering various aspects of the CSDDD including guidance on specific sectors and specific adverse impacts, non-binding contractual clauses, how to conduct due diligence and Climate Transition Plans.

Timing of Application

The CSDDD will have a phased application as follows:

Application period from entry into force of the CSDDD	EU Company Criteria	Non-EU Company Criteria
3 years	Employees: 5,000 Net worldwide turnover: EUR1,500 million	Net EU turnover: EUR1,500 million
4 years	Employees: 3,000 Net worldwide turnover: EUR900 million	Net EU turnover: EUR900 million
5 years	All other in-scope companies

Next Steps

As mentioned above, the text of the CSDDD needs to be formally adopted by both the Parliament and Council.  It is expected that the Parliament will vote on the text on 24 April 2024.  If subsequently approved by the Council, the CSDDD will be published in the Official Journal of the EU and will enter into force 20 days after its publication.  Member States will have two years to transpose the CSDDD into national law and the obligations will begin to apply as per the phased application set out above.