European Parliament adopts revised CSDDD proposal

Aim of the CSDDD

The CSDDD defines the obligations of companies regarding existing and potential adverse impacts on the environment and human rights along the entire supply chain. Companies must not only identify, assess, prevent, mitigate, remedy, and eliminate their adverse impacts on human rights and the environment, but also the behaviour of their upstream and downstream value chain.

In particular, the CSDDD stipulates a mandatory sustainability audit for companies falling within the scope of the directive. This due diligence obligation applies not only to the behaviour of a company's direct contractual partners, but also to its entire supply chain. It is important to note that the definition of the term "downstream chain of activities" has been narrowed by removing references to product disposal and restricting it to business partners working for or on behalf of the company.

To ensure effective compliance, the CSDDD also imposes sanctions and provides for civil liability for breaches of these obligations, which are explained in more detail below. In addition, Article 15 of the CSDDD requires companies to implement a transition plan to reduce climate change that ensures the alignment of their business model and corporate strategy with the Paris Agreement.

Changed scope of application

The Commission's original proposal was to apply the CSDD to companies with more than 500 employees and a global net turnover of EUR 150 million or to companies with more than 250 employees and a global net turnover of EUR 40 million, 50 per cent of which is generated in so-called "high-risk sectors". However, on 1 June 2023, the European Parliament voted to amend this scope and set the following thresholds:

1. companies with more than 250 employees and a worldwide net turnover of more than EUR 40 million, irrespective of the sector; and 
2. ultimate parent companies with more than 500 employees and a worldwide net turnover of more than EUR 150 million

This amendment broadly corresponded to the thresholds in Article 40a (1) of the CSRD. However, following the provisional agreement with the European Council on 14 December 2023, this threshold was raised once again. The CSDDD should apply to EU-based companies with more than 500 employees and a worldwide net turnover of more than EUR 150 million, while the threshold for non-EU companies was set at a worldwide net turnover of more than EUR 150 million achieved in the EU three years after the Directive enters into force.

Following a lengthy discussion in the European Council, the member states decided to raise the thresholds once again and thus limit the scope of the CSDDD to larger companies. Based on the text proposed by the Legal Affairs Committee of the European Parliament (JURI) on 15 March 2024, the scope of application of the CSDDD (subject to final approval by the European Council) will in due course apply to large companies with more than 1,000 employees and an annual worldwide net turnover of more than EUR 450 million, as well as to larger companies, as set out in section 3 below. It should be noted that an ultimate parent company, which in isolation does not fall within the scope of the CSDDD, could nevertheless fall within the scope of the CSDDD if the overall group exceeds 1,000 employees and has a worldwide net turnover of more than EUR 450 million.

Due to the increase in the threshold, fewer companies fall within the scope of the CSDDD. In addition, the "high-risk sector" approach provided for in the Commission proposal has been cancelled and will no longer apply. Instead, Article 13(1a)(c) of the CSDDD sets out guidelines for companies on, among other things, "sectoral risk factors, including associated factors".
"Small and medium-sized enterprises" (SMEs) do not initially fall within the scope of the CSDDD. Nevertheless, SMEs are likely to be indirectly affected as companies in this scope will have to apply due diligence throughout their value chain. Even though the definition of the term "downstream value chain" has been limited to business partners working for or on behalf of the company, it is therefore possible that companies that do not fall directly within the scope of the CSDDD may be indirectly affected.

It should be noted that other ESG instruments with a broader scope could nevertheless generally impose specific/additional due diligence obligations that are similar to risk identification obligations or obligations related to the due diligence process. For example, the CSRD contains a reporting obligation on the company's sustainability due diligence, and Article 8(1) and Article 10(1)(2)(h) of the EU Deforestation Regulation contain a specific due diligence obligation, whereas the due diligence obligation under the Critical Raw Materials Act refers to other voluntary due diligence guidelines and the reporting obligation under the CSRD. Thus, companies that do not fall within the scope of the CSDDD could still be subject to ESG reporting and other due diligence requirements (or substantially similar requirements).

Implementation and application 

It should be emphasised that the planned CSDDD does not (yet) have any direct impact on companies operating in the EU. The text of the CSDDD must first be formally approved by the European Parliament and the European Council, which is expected on 23 May 2024 as the final step in the legislative process. The CSDDD will then enter into force on the twentieth day following its publication in the Official Journal of the EU. The EU member states must then transpose the content of the adopted CSDDD into national law within a certain transposition period (in accordance with Article 31 CSDDD), as EU directives do not have direct legal effect for companies.

In addition, the provisions of the CSDDD will be applied in a cascading timeframe, which means that it will enter into force gradually, as shown in the table below:

Commitments

The due diligence obligations to be complied with relate primarily to business partners working for or on behalf of the company and include preventive and remedial measures as well as comprehensive reporting. Companies are required to consider both the upstream and downstream supply chain/value chain. In cases where environmental or human rights violations by a supplier cannot be averted or stopped, the ultima ratio may be to terminate the business relationship with this supplier. According to the adapted CSDDD, however, such a contract termination will be the last resort, with the company concerned itself defining an appropriate timeframe in its preventive or corrective action plan. In all other respects, termination will be assessed according to whether it would lead to manifestly more serious adverse effects. 

The regulation also brings about a significant improvement in environmental protection measures. It includes a wide-ranging consideration of all measurable environmental impacts, including harmful soil changes, harmful emissions, water or air pollution, excessive water consumption and other impacts on natural resources.

In addition, the CSDDD contains a risk-based approach. According to Articles 7 and 8 of the CSDDD, a company is only obliged to take measures if it is directly responsible for CSDDD-related risks. Otherwise, a general due diligence obligation applies to the company within the scope of the Directive. In contrast to the amendments proposed by the European Parliament, the due diligence obligation for directors of companies within the scope of application is not covered by the CSDDD. However, it is at the discretion of the EU Member States to include such a due diligence obligation in their national implementation of the CSDDD.

In addition, Article 15 of the CSRD requires companies that fall within the scope of the CSDDD to draw up a transition plan aimed at limiting global warming to a maximum of 1.5 °C in accordance with the Paris Agreement.

Sanctions and civil liability

The CSDDD enforces compliance through both private and public means, such as administrative penalties. In terms of private enforcement, the CSDDD does not impose a specific duty of care on business managers to incorporate sustainability objectives into their business decisions. This is new compared to the Parliament's original position in 2023. However, Member States are not prohibited from imposing such a duty of care. The CSDDD also does not preclude judges from deciding on the basis of national open standards that the neglect of sustainability aspects in corporate decisions violates a director's duty of care.

In order to ensure access to justice for those affected, the CSDDD introduces a supplementary civil liability mechanism. The deadline for the assertion of claims by injured parties, including trade unions and civil society organisations, is five years. 

Following the discussion in the trilogue, the CSDDD provides for (procedural) simplifications in relation to the disclosure of evidence, injunctive measures and the costs of proceedings for plaintiffs. Finally, the CSDDD obliges companies that have identified adverse impacts on the environment or human rights by some of their business partners to terminate these business relationships if these impacts cannot be prevented or ended. 

In addition, a company within the scope of the Directive can be held liable for damage caused to a natural or legal person if the company intentionally or negligently breaches its obligations under the CSDDD. However, the company cannot be held liable for damage caused by its business partners in the value chain.

In addition to a civil liability clause, the CSDDD also provides for other sanctions. In this context, the CSDDD requires Member States to designate a national competent supervisory authority to carry out inspections and, if necessary, impose sanctions. These sanctions include "naming and shaming" (i.e. the public disclosure of infringements) and fines based on turnover (up to 5 per cent of global net turnover in accordance with Article 20 CSDDD). In the event that companies do not pay these fines, the CSDDD also provides for various injunctive measures. Finally, compliance with the CSDDD can also be used as a criterion for the award of public contracts and concessions.

Relationship with CRSD 

As already mentioned, the sustainability due diligence obligations in the CSDDD and the sustainability reporting obligations in the CSRD will form the "backbone" of European ESG law in future. While the CSDDD focuses on continuously identifying and combating negative impacts on human rights and the environment, the CSRD requires companies to report on their sustainability impacts in accordance with the principle of double materiality. Therefore, the objective of the CSDDD cannot be seen in complete isolation from the purpose of the CSRD. It is not surprising that the European legislator has also recognised the connection between these two instruments.

For example, recital 44a of the CSDDD states that where companies are both within the scope of the CSDDD and are required to report on their due diligence process under the CSRD, the reporting obligation under the CSRD should be understood as an obligation for companies to describe how they implement due diligence as defined in the CSDDD. Like the CSRD, Article 6a(2) of the CSDDD allows companies within its scope to prioritise their due diligence according to the severity and likelihood of the adverse human rights or sustainability risks in question. In addition, Article 15(3) of the CSDDD provides that companies that are required to submit a transition plan for climate change mitigation under the CSRD are deemed to fulfil the same obligation as in Article 15(1) of the CSDDD. Thus, a climate transition plan under the CSRD can also be used in the context of the obligations under the CSDDD.

If you would like more information about the CSDDD and its specific implications for your company, please feel free to contact our CSDDD experts Pauline Kuipers, Dr Matthias Spilker, Alexandre Vuchot, Felix Schmidtke and Sander Wagemakers. We will be happy to help you realise your company's ESG ambitions. Would you like to read more? We also recommend the article by our German colleagues on the CSDDD in connection with the Supply Chain Act (LKGS).