News regarding the Corporate Sustainability Due Diligence Directive

15 March 2024, the Committee of the Permanent Representatives of the Governments of the Member States to the European Union (“COREPER”) endorsed the Corporate Sustainability Due Diligence Directive (“CSDDD”) taking the directive one important step closer to finalizing the legislative process. 19 March 2024, the Legal Affairs Committee approved the bill. Once formally approved by the European Parliament and the member states, CSDDD will enter into force on the twentieth day following its publication in the EU Official Journal.

CSDDD lays down rules on:

• Companies regarding actual and potential human rights adverse impacts and environmental adverse impacts. This with respect to their own operations, the operations of their subsidiaries and the operations carried out by their business partners in companies’ chains of activities.
• Liability for violations of the obligations mentioned above.
• Obligation to adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, compatibility of the business model and strategy of the company with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C.

The endorsed proposal has the following highlights:

Application

CSDDD will apply to the following EU companies:

1. EU companies with more than 1000 employees and a net worldwide turnover of more than EUR 450 million;
2. EU companies that did not reach the thresholds under (i) but is the ultimate parent company of a group that reaches the thresholds; and
3. EU companies that have entered into or is the ultimate parent company of a group that entered into franchising or licensing agreements in the EU in return for royalties with independent third-party companies. This where such agreements ensure a common identity, a common business concept and the application of uniform business methods, and where these royalties amount to more than EUR 22.5 million. However, it requires that the company had or is the ultimate parent company of a group that had a net worldwide turnover of more than EUR 80 million.

CSDDD will apply to the following non-EU companies:

1. non-EU companies generating a net turnover of more than EUR 450 million in the EU;
2. non-EU companies that did not reach the thresholds under point (i) but is the ultimate parent company of a group that on a consolidated basis reaches the thresholds; and
3. non-EU companies that have entered into or is the ultimate parent company of a group that has entered into franchising or licensing agreements in the EU in return for royalties with independent third-party companies. This where such agreements ensure a common identity, a common business concept and the application of uniform business methods, and where these royalties amount to more than EUR 22.5 million. However, it requires that the company generated or is the ultimate parent company of a group that generated a net turnover of more than EUR 80 million in the EU.

Holding company exemption

Ultimate parent companies may be exempt from carrying out the obligations under CSDDD (such ultimate parent company must apply for the exemption to the competent supervisory authority). However, for such exemption it is provided that the ultimate parent company has as its main activity the holding of shares in operational subsidiaries and does not engage in taking management, operational or financial decisions affecting the group or one or more of its subsidiaries.

The exemption is further subject to the condition that one of the ultimate parent company’s subsidiaries established in the EU is designated to fulfil the due diligence obligations on behalf of the ultimate parent company. Further, the ultimate parent company shall remain jointly liable with the designated subsidiary.

High-risk sectors

CSDDD application is no longer based on whether companies operate within what the earlier versions called “high-risk sectors”. A review clause has been included giving the option to introduce such sector-specific approach at a later stage.

Financial sector

For regulated financial undertakings, the definition of the term “chain of activities” (more on this term below) should not include downstream business partners that are receiving their services and products. Consequently, as regards regulated financial undertakings, only the upstream but not the downstream part of their chain of activities is covered by CSDDD. However, the upstream part of their chain of activities (according to the preamble of the directive), as it is highlighted also in the OECD Guidelines for Multinational Enterprises, regulated financial undertakings are expected to consider adverse impacts and to use their so-called “leverage” to influence companies.

A review clause has been included regarding the financial sector, requiring the Commission to make a new impact assessment and, if relevant, legislative proposals, on the later inclusion of financial undertakings in the full scope of the CSDDD.

Impact on SMEs

SMEs are not covered by the scope of the CSDDD. However, SMEs could be indirectly impacted by the provisions of the directive as contractors or subcontractors to the companies within scope of CSDDD.

AIFs and UCITS

A new clause has been introduced clarifying that CSDDD shall not apply to AIFs or to UCITS.

Directors’ duties

The Commission’s original proposal contained provisions about directors’ duties which have been basis to much debate. These provisions (article 25 and 26 of the original proposal) have not been included in the final compromise text.

Enforcement and liability

CSDDD entails administrative liability and penalties. The maximum limit of pecuniary penalties shall be no less than 5% of the net worldwide turnover of the company in the financial year preceding the fining decision. Further, member states shall ensure that a company can be held liable for a damage caused to a natural or legal person, provided that the company intentionally or negligently failed to comply with the obligations of the CSDDD and such failure resulted in a damage to the natural or legal person’s legal interest protected under national law. However, a company cannot be held liable if the damage was caused only by its business partners in its chain of activities.

Public tenders

Compliance with CSDDD may also be used as a criterion to qualify for the award of public tenders in member states.

Complaints

Trade unions and civil society organisations will be entitled to submit complaints to in-scope companies for potential non-compliance with the obligations entailed by CSDDD.

The due diligence obligation is relevant for the “chain of activities”. This chain covers:

• Activities of a company’s upstream business partners related to the production of goods or the provision of services by the company, including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of the products and development of the product or the service; and
• Activities of a company’s downstream business partners related to the distribution, transport and storage of the product, where the business partners carry out those activities for the company or on behalf of the company.

The endorsed wording of the CSDDD can be accessed here.

Next steps: We monitor the CSDDD closely which is now subject to adoption by the European Parliament and a formal approval by the EU Council. CSDDD will be phased in in the following way:

1. companies with 5,000+ employees and a net worldwide turnover of more than EUR 1,500 million must comply with the requirements 3 years after their entry into force;
2. companies with 3,000+ employees and a net worldwide turnover of more than EUR 900 million after 4 years; and
3. companies with 1,000+ employees and a net worldwide turnover of more than EUR 450 million after 5 years.

Tags:  CSDDDSustainability