Scope and Implementation

This second article on the Corporate Sustainability Due Diligence Directive (CSDDD) follows up an investigation of the nature and key requirements and obligations of the recently adopted Directive.  On April 24th, 2024, the European Parliament adopted the CSDDD mandating large companies with significant EU activities to conduct human rights and environmental due diligence within their operations and supply chains.

The CSDDD aims to harmonise due diligence requirements across EU Member States, ensuring responsible business conduct. It sets minimum standards for national laws, requiring Member States to update or develop legislation to meet these standards, but allows for stricter regulations and broader activity scope if desired.

This article considers the scope of inclusion in the provisions of the Directive, its implementation timetable, and how it will be monitored and enforced. It also briefly considers some of the hurdles that now face companies as they seek to comply with its requirements. 

Scope of Employee and Turnover Thresholds

The CSDDD primarily targets large companies, which are categorised into distinct groups based on employee and turnover thresholds. Group 1 includes companies with over 500 employees and a net turnover exceeding €150 million globally. Group 2 consists of companies with more than 250 employees and a net turnover of over €40 million, provided that at least 50% of this turnover comes from high-risk sectors such as textiles, agriculture or minerals.

These requirements apply to three main categories of companies based on their location. EU Companies are those incorporated within the European Union and meet the specified thresholds. Third Country Companies are non-EU companies that have substantial operations within the EU, meaning they meet the employee and turnover thresholds through their EU-based activities. Franchised Companies include businesses operating under a franchising agreement within the EU, which must also adhere to the Directive if they meet the specified thresholds through their franchise operations.

These thresholds must be satisfied for two consecutive financial years to ensure consistency. The ultimate parent company is typically responsible for meeting these obligations. However, if the parent company is merely a holding entity not involved in direct management, financial or operational decisions, a designated subsidiary will be responsible for compliance, ensuring due diligence practices are effectively integrated across the organisation.

Activities

The CSDDD mandates that all EU and non-EU companies meeting the specified thresholds conduct comprehensive due diligence across their supply chains, focusing on three key activity categories: upstream, own operations and downstream.

  • Upstream activities encompass the sourcing and procurement processes, including raw materials and components. Companies must ensure that their suppliers adhere to human rights and environmental standards.
  • Own operations refer to the companies’ internal processes and activities, where they must embed responsible business practices and monitor compliance within their direct control.
  • Downstream activities cover the distribution, transportation and storage of products. While the focus is primarily on upstream and own operations, specific downstream activities are also subject to due diligence requirements to ensure that products are handled and transported in a manner that aligns with the Directive’s standards.

Implementation timeline

The Directive will be formally implemented starting from the end of May 2024, coming into force 20 days after its publication in the Official Journal of the European Union. The implementation will be phased, beginning with a two-year period during which EU Member States must transpose the CSDDD into national law. Countries like Germany and France, which already have existing due diligence laws, will likely augment these laws to meet the new Directive’s standards instead of creating entirely new legislation.

The phased-in application is designed to accommodate companies of various sizes. Starting from 2027, companies with over 5,000 employees and a turnover exceeding €1,500 million will be required to comply. In 2028, the Directive will apply to companies with more than 3,000 employees and a turnover above €900 million. By 2029, companies with over 1,000 employees and a turnover exceeding €450 million, as well as those involved in franchising or licensing with significant turnovers, will need to comply.

Additionally, the EU Commission will assess the need for tailored due diligence requirements for financial institutions by May 2026, considering existing legislation for regulated financial undertakings​.

Enforcement and monitoring

The enforcement and monitoring of the CSDDD will be rigorous and multi-faceted. Each EU Member State will designate national supervisory authorities responsible for overseeing the Directive’s implementation and ensuring company compliance. These authorities will establish accessible channels for submitting substantiated concerns about non-compliance, investigate such concerns promptly, and have the authority to initiate investigations and conduct inspections based on sufficient evidence of breaches.

Administrative sanctions for non-compliance will be significant, potentially amounting to at least 5% of the company’s net worldwide turnover from the previous financial year. Additionally, there will be provisions for civil liability, enabling victims to seek compensation through national legal systems. These mechanisms will include measures to reduce the costs and complexities of legal proceedings, enhancing access to justice for affected individuals, trade unions and civil society organisations​.

Monitoring will be an ongoing process. The EU Commission will periodically review the Directive’s implementation, focusing on its impact on small and medium-sized enterprises (SMEs), the effectiveness of support tools, and the scope and thresholds of the Directive. Special attention will be given to the design and implementation of climate transition plans by companies, which are critical components of the Directive. Furthermore, the Commission will assess the effectiveness of enforcement mechanisms and the level of harmonisation achieved through national transpositions of the law​.

Support

The EU Commission will set up a helpdesk to offer information and guidance to companies on how to implement the Directive, with advice tailored to national contexts. Additionally, Member States will develop dedicated websites, tools and platforms, accessible not only to companies but also to stakeholders and their representatives.

Aims and Challenges

The EU’s CSDDD aims to foster responsible business conduct by mandating large companies to manage human rights and environmental risks throughout their operations and supply chains. This Directive seeks to create a more sustainable and ethical market, protecting both people and the planet.

However, the business community has raised several significant concerns. Firstly, the complexity and cost of compliance pose a challenge, particularly for companies with extensive global supply chains​​. Secondly, the risk of inconsistent enforcement across Member States could create an uneven playing field, making it difficult for companies to navigate differing national implementations​. Lastly, the stringent penalties, including fines up to 5% of global turnover, are seen as potentially excessive and could have severe financial repercussions for non-compliance​. These concerns highlight the need for clear guidelines and consistent enforcement to ensure the Directive achieves its positive aims without placing undue burdens on businesses.