On July 25th, 2024, the European Commission’s Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) came into force, marking a significant shift toward effective sustainability reporting and promoting responsible corporate behaviour across EU-regulated and monitored value chains.
The CSDDD introduces mandatory requirements for companies to adopt comprehensive due diligence practices and climate transition plans. This Directive will directly impact roughly 13,000 businesses across the European Union and around 4,000 outside the EU. Below, we discuss everything you need to know about this upcoming piece of legislation and how it relates to the EU’s Corporate Sustainability Reporting Directive (CSRD).
What is CSDDD?
The purpose of the Directive is to foster responsible and sustainable corporate behaviour in companies’ operations and across their value chains. These new rules will ensure that companies in scope not only identify but also address adverse environmental impacts and human rights regarding their actions inside and outside Europe.
Although numerous EU member countries have due diligence legislation in place, these laws are generally sector-specific, voluntary, and only address single aspects like child labour. Overall, the CSDDD strives to bring a more mandatory and comprehensive approach to sustainability reporting.
Key objectives of the CSDDD
The Directive establishes a corporate due diligence duty. Core elements of this duty are to identify and address potential and actual negative environmental impacts and human rights in the company’s own operations, their subsidiaries, and where related to their value chain(s), those of their business partners.
Additionally, the Directive sets out an obligation for large companies to adopt and put into effect a transition plan for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement as well as intermediate targets under the European Climate Law. The CSDDD is the first piece of EU legislation that will mandate businesses to adopt a climate transition plan.
Who falls under the scope of the CSDDD?
The new EU rules will apply to large EU limited liability companies and partnerships, large non-EU companies, and SMEs. Currently, the financial sector has been excluded from the Directive, despite being included in the existing sectoral OECD guidance.
The Directive applies to EU-based businesses with more than 500 employees and a turnover of over €150 million. Companies with over 250 employees and a €40 million turnover also fall under the CSDDD, provided that 50 percent of their revenue comes from high-risk industries such as agriculture, fashion, or minerals.
Non-EU companies operating within the EU also fall under the scope of the CSDDD. This includes third-country companies active in the EU that meet the turnover thresholds aligned with the other groups mentioned above. However, the revenue must be generated in the EU, irrespective of whether they have a subsidiary or branch in the region.
The CSDDD timeline
Member States will have to transpose the Directive into national law and communicate the relevant texts to the European Commission by the 26th of July, 2026. A year later, the rules will begin to apply to the first group of companies, following a staggered approach, with full application on the 26th of July, 2029. The Commission will issue a set of guidelines which will help companies conduct due diligence.
How does the CSDDD relate to the CSRD?
The CSDDD and the CSRD are separate pieces of legislation, however, they are both components of the European Green Deal and do complement each other by focusing on sustainability matters. The CSRD primarily focuses on reporting sustainability information, while the CSDDD looks at taking action through due diligence procedures.
Conclusion
The CSDDD is a pivotal piece of EU legislation that seeks to hold companies accountable for their environmental and human rights impacts across their value chains. By mandating due diligence and climate transition plans, this Directive paves the way for a more sustainable and responsible business landscape.
While the Directive’s staggered implementation timeline allows companies time to adapt, its ambitious scope will have far-reaching consequences for businesses within and outside of the EU. When combined with complementary legislation like the CSRD, the CSDDD represents a comprehensive approach to sustainability, setting a higher standard for business accountability in line with the goals of the European Green Deal.
