Europe has taken a crucial step in its commitment to corporate sustainability by adopting the Corporate Sustainability Due Diligence Directive (CSDDD). This new regulation, approved by the European Parliament on April 24, establishes a rigorous framework for companies to operate responsibly with regard to human rights, the environment and climate change. 

The CSDDD represents a significant evolution in the regulation of business practices in the European Union, with the aim of ensuring that companies take responsibility for identifying and mitigating any adverse impacts on human rights and the environment, as well as having a transition plan for climate change mitigation. 

Which companies will be affected?

The application of the CSDDD will primarily target companies with a presence in the European Union, specifically large companies with more than 1,000 employees and a minimum annual turnover of €450 million. Third-country companies with activities in the EU will also be subject to the regulation, based on their turnover, as well as parent companies and franchises: 

• European companies with more than 1,000 employees and an annual net turnover of more than 450 million euros. 
• Non-European companies with an annual net turnover generated in the EU of more than 450 million euros. 
• Parent companies of large groups. 
• Franchises with a net turnover of more than 80 million euros if at least 22.5 million euros of that amount has been generated by royalties. 

For the time being, the implementation of the CSDDD will not affect small and medium-sized enterprises (SMEs), as they are not directly covered by the proposal, although they will be indirectly affected as they are part of the supply chain. 

What is the application time?

The regulation will be implemented gradually after approval by the European Parliament. The CSDDD is expected to be adopted in May by the European Council and then published in the Official Journal of the EU in June. It would start to be implemented in 2027 as follows: 

• 2027: companies with 5,000 employees and 1.5 billion euros in turnover. 
• 2028: companies with 3,000 employees and 900 million euros in turnover. 
• 2029: companies with 1,000 employees and 450 million euros in turnover. 

What obligations will companies have?

The CSDDD sets out a number of obligations for companies to comply with human rights, environmental and climate change due diligence. These obligations include: 

- The adoption of a due diligence policy. 

- The assessment of negative impacts on human rights and the environment. 

- Prevention and mitigation of such impacts. 

- The implementation of a grievance procedure. 

- Monitoring the effectiveness of the measures adopted. 

- Public communication on due diligence. 

- Adaptation of a climate transition plan in accordance with the Paris Agreement. 

These are some of the main novelties of this new Corporate Due Diligence Standard (CSDDD)*.

1. Risk-based approach: Companies will need to prioritize the most salient adverse environmental and human rights impacts, both actual and potential, occurring in their activity chains, based on the severity and likelihood of those impacts. 
2. Harmonization: The basic due diligence obligations (identify and assess, prevent and mitigate, terminate and minimize the extent of adverse impacts) should be fully harmonized. 
3. Chain of activities: Companies will have to conduct a comprehensive risk assessment along the supply chain upstream for activities related to the production of goods or the provision of services, but also for downstream activities related to distribution, transportation and storage, provided that these activities are performed by direct business partners. 
4. Liability: Companies shall not be liable for any damage caused by their business partners in their chain of activities. 

*Note: This is simply a brief selection of some of the changes highlighted. For more information, we recommend consulting the full Directive.

Next steps

With the approval of the European Parliament, the implementation of the CSDDD is almost a done deal. EU representatives will meet at COREPER on May 15 to finally approve the final text. A week later, on May 23, EU ministers will give the final green light to the CSDDD.  

The final text will subsequently be published in the Official Journal of the European Union (OJEU). This means that, from publication in the OJEU, Member States have two years to incorporate due diligence into their legislation.