CSDDD is here to stay; the EU clock is ticking for mandatory supply chain due diligence

After, one could say, a tumultuous legislative process, the ‘Corporate Sustainability Due Diligence Directive 2024/1760’ (CSDDD or CS3D) was finally published in the EU’s Official Journal on 5 July 2024. Together with the ‘Corporate Sustainability Reporting Directive 2022/2462’ (CSRD), this mandatory ESG due diligence framework can be seen as the pillars of EU ESG law.

In our blog of 24 April 2024, we discussed their main takeaways of the adopted revised CS3D. In this blog, we provide a brief recap of the CSDDD essentials and its timing for companies based in the EU as well as in so-called third countries – i.e. anywhere in the world – when they do substantial business in the EU. And when we speak of EU, we not only mean the European Union but also the European Economic Area (which adds Norway, Iceland and Liechtenstein to the 27 EU Member States).

What does the CSDDD entail?

The CSDDD establishes obligations for large companies concerning both existing and potential adverse effects on the environment and human rights throughout their entire business chain of activities or value chain. Companies will not only have to identify, assess, prevent, mitigate, end, and remedy their won adverse impact on human rights and the environment but also take into account the conduct of their upstream and downstream partners.

The mandatory sustainability due diligence obligation for in-scope companies under the CSDDD is also not limited to the conduct of a company’s direct contractual business partners, but also its entire supply chain. Yet, it is important to note that the definition of ‘’downstream chain of activities’’ has been narrowed during the legislative process by deleting the references to the disposal of the product, and by limiting it solely to business partners who carry out activities for the company or on behalf of the company.

To effectively ensure compliance, the CSDDD also requires Member States to impose penalties and civil liability for infringing those obligations. Moreover, Article 15 CSDDD also obliges companies to implement a climate change reduction plan that ensures alignment of their business model and strategy with the Paris Agreement.

To whom does the CSDDD apply and when does it become applicable? 

With the publication of the CSDD in the EU Official Journal, the clock starts ticking for both EU Member States – to transpose the Directive into their national laws – and for companies – to prepare for compliance with its obligations. The CSDDD was published on 5 July 2024, which means that it enters into force on 25 July 2024.

Like the CSRD, the CSDDD is a Directive, which means that it must be transposed into the national laws of the EU Member States before 26 July 2026. 

Like the CSRD, the obligations of the CSDDD become applicable in stages, depending on the amount of turnover and number of employees (in case of EU-based undertakings) of the company. The employee-numbers threshold does not apply to non-EU companies, but on the other hand, their EU turnover is decisive instead of their worldwide turnover.

This staged application provides in-scope companies with a long preparation period in anticipation of the staged application dates. In contrast to the CSRD, the CSDDD provides for different thresholds relating to both turnover and (for EU-based companies only) employee numbers. The table below provides a brief overview of the thresholds and the year that the due diligence obligations become applicable to the concerned undertaking. 

Overview application dates CSDDD/CS3D

As set out in the table above, the CSDDD extends to non-EU “ultimate parent companies” of EU-based groups, which taken together as a group (including both its EU-based and non-EU-based subsidiaries), meet the above thresholds, so on consolidated basis. However, an ultimate parent company may be exempt if mainly holds 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. Additionally, one of the EU subsidiaries must be designated to fulfil the parent’s obligations under the CSDDD, and this parent has obtained the required exemption from the competent supervisory authority.

Main obligations for in-scope companies

In-scope companies must conduct a risk-based human rights and environmental due diligence (as laid out in Articles 7 to 16 CSDDD) that is integrated into all their relevant policies and risk management systems and put in place a due diligence policy. Furthermore, companies must publish an annual statement on their website on the matters covered by the Directive. The European Commission will adopt delegated acts detailing the information that must be included in due diligence reports in order to comply with CSDDD.

From 1 January 2029, companies must also provide a statement to the relevant collection body for making this information accessible to the ‘European single access point’ (ESAP). Companies that are located outside of the EU but place their products on the EU market must appoint an authorised representative that is established or domiciled in one of the Member States where it operates in accordance with Article 23 CSDDD to be able to communicate with supervisory authorities about due diligence compliance on their behalf.

Overlap CSRD and CSDDD 

In case companies fall both within the scope of the CSDDD and at the same time are subject to report on the sustainability data of their supply chain pursuant to the CSRD, the CSDDD provides that the reporting obligation under the CSRD shall be understood as the requirement for companies to describe how they implement due diligence within the meaning of the CSDDD. Article 16 CSDDD exempts companies that are already subject to CSRD reporting obligations from publishing a (separate) report on their compliance with CSDDD.

Moreover, Article 15 CSDDD also obliges companies to implement a climate change reduction plan that ensures alignment of their business model and strategy with the Paris Agreement. Furthermore, like the CSRD, Article 6a CSDDD also allows in-scope companies to prioritize their due diligence process based on severity and likelihood of the concerned adverse human rights or sustainability risks.

Transposition of CSDDD by EU Member States

As said, the CSDDD is an EU directive and, therefore, requires transposition into the national legislation of the Member States. To fully understand the impact of the CSDDD a further analysis on the national implementation legislation is required. 

Some Member States, such as for example the Netherlands had introduced a proposal in the past on a similar piece of legislation, which has then been put on hold in anticipation of CSDDD. It remains to be seen whether earlier proposals in anticipation of the CSDDD will be used. Other Member States, like Germany and France, were ahead of the CSDDD and already introduced national sustainability due diligence laws in their country. These will need to be amended in accordance with CSDDD, assuming that they are not yet already fully aligned.