European Parliament and Council reach agreement on Corporate Sustainability Due Diligence Directive (CSDDD)

Since its inception, EU legislators have anticipated that CSDDD would apply to both EU and non-EU companies. This has been retained following the trilogue negotiations.

Two types of EU incorporated companies will be covered:

1. those with more than 500 employees and a net annual turnover in excess of €150 million; and
2. those with more than 250 employees and a net annual turnover in excess of €40 million, where at least half of that turnover is generated from certain sectors.¹

CSDDD will also apply to non-EU companies, although different turnover thresholds and phase-in periods may apply to non-EU companies. The EU bodies’ press statements have not elaborated on these details, which will be set out in the text of the Directive once published.

CSDDD will require within scope companies to undertake risk-based human rights and environmental due diligence to identify and assess actual and potential adverse impacts, and (as appropriate) prevent, mitigate, bring an end to and remedy such impacts in their own operations and value chains. For these purposes, the definition of “value chain” will include “upstream” activities such as production and supply, as well as certain “downstream” activities such as distribution and recycling.

The previous drafts of CSDDD published by the Commission, Council and Parliament anticipated that companies would need to implement due diligence policies, supported by “appropriate measures” to: (a) identify actual or potential impacts; and (b) then, address such impacts, including for example through developing and implementing preventative action plans / corrective action plans; provision of compensation for those impacted; necessary investments in management, infrastructure and production processes; obtaining contractual assurances from business partners; and targeted and proportionate support for small and medium enterprises (SMEs). A more detailed analysis of CSDDD’s proposed requirements, set out in the Commission’s original draft, is available here.

While a final text of CSDDD has yet to be published, we expect these core due diligence requirements to be retained, subject to any specific refinements around the scope and content of the measures that companies will be required to implement. Companies will be obliged by CSDDD to not only identify their own adverse human rights and environmental impacts, but also those of their business partners. If an in-scope company becomes aware of such an impact which cannot be adequately prevented or ended, it must end the affected business relationship.

Companies will also have to carry out meaningful engagement with affected stakeholders, establish and maintain a notification mechanism and complaints procedure, periodically monitor the effectiveness of the measures taken, and publicly communicate on their due diligence practices.
CSDDD will also require certain companies to adopt climate change transition plans in accordance with the Paris agreement.