The European Union (EU) formally adopted the "Corporate Sustainability Due Diligence Directive" (CSDDD) on July 25, 2024.
The EU formally adopted the "Corporate Sustainability Due Diligence Directive" (CSDDD) on July 25, 2024. The mandatory environmental and human rights due diligence obligations of the CSDDD will apply to regulated enterprises in mid-2027.
This is the first time that the EU has incorporated the United Nations Guiding Principles on Business and Human Rights (UNGPs) into its legal system, mandating that large companies should respect the environment and human rights in their operations, setting an important milestone for Responsible Business Conduct (RBC) legislation.
1. Scope of application:
🔹 The directive applies to EU and non-EU companies with over 1,000 employees and a global annual net turnover exceeding 450 million euros, covering all activities from upstream operations to downstream distribution, transportation, and storage. It also eliminates specific norms for high-risk industries and establishes a phased implementation period for businesses.
🔹 The CSDDD's scope for the financial sector is restricted to its own operations and upstream supply chains. However, the directive includes review provisions, and its application to the financial industry may be expanded in the future, depending on the European Council's impact assessment results.
2. Applicable period for phased enterprises
Depending on the size and turnover of different enterprises, the duration of the applicable instructions is also different.
🔹EU companies
- For EU companies with more than 5,000 employees and a turnover of more than 1.5 billion euros, the directive will apply three years after they come into effect;
- For EU companies with more than 3,000 employees and a turnover of more than 900 million euros, it will be applicable 4 years after it takes effect;
- For EU enterprises with more than 1,000 employees and a turnover of more than 450 million euros, it will be applicable 5 years after it takes effect.
🔹Non-EU companies
(1) For non-EU companies with a turnover of more than 1.5 billion euros, the directive will apply three years after they come into effect;
(2) For non-EU companies with a turnover of more than 900 million euros, it will be applicable 4 years after it takes effect;
(3) For non-EU enterprises with a turnover exceeding 450 million euros, it will be applicable 5 years after it takes effect.
3. Enterprises have the following obligations:
Enterprises are required to adopt risk-based measures to identify, evaluate, prevent, mitigate, and address (or minimize) potential and actual environmental and human rights impacts within their operations and supply chains. These measures must be integrated into corporate policies. Companies should monitor the effectiveness of their due diligence efforts, and EU member states must ensure businesses engage in meaningful dialogue with potentially affected stakeholders. Additionally, companies are obligated to establish grievance mechanisms and implement other remedial measures. The directive also mandates the development of a "climate change mitigation transition plan" to align business models and strategies with the goals of the Paris Agreement.
4. Penalties:
Competent authorities of member states may impose penalties on companies that fail to comply with relevant regulations, including publishing their company names (naming and shaming) and imposing fines of up to 5% of their global annual net turnover.
5. Victims’ rights and remedies:
Victims affected by corporate environmental damage and human rights violations have at least five years to file a claim. Trade unions and NGOs can still bring claims for compensation under certain conditions and without prejudice to the country's civil procedure rules.
6. Effectiveness and implementation:
The CSDDD will come into effect 20 days after it is published in the EU Journal, and member states should incorporate the contents of the directive into their domestic laws within 2 years to facilitate implementation.
Reference:
The official website of the European Council: https://commission.europa.eu/business-economy-euro/doing-business-eu/sustainability-due-diligence-responsible-business/corporate-sustainability-due-diligence_en