Due Diligence Directive Gets Green Light: All the Key Points

From its initial inception, the Corporate Sustainability Due Diligence Directive (CSDDD) has been a cornerstone in the European Union's efforts to harmonize and strengthen corporate responsibility policies related to human rights and environmental sustainability.

The recent approval of the CSDDD by the European Parliament , with 374 votes in favor against 235 and 19 abstentions, marks a significant milestone in European legislation, culminating nearly five years of intense debate and negotiations.

This legislative process began in September 2019 when civil society organizations (CSOs) first met with European parliamentarians to discuss the ambitious Corporate Sustainability initiative. This led to a report from the European Parliament with recommendations to the Commission on due diligence and corporate accountability, followed by the initial Parliament position on the European Commission ’s proposal.

The Commission's proposal, introduced on February 23, 2022, complemented other existing and upcoming legislative acts, such as the deforestation regulation, conflict minerals regulation, and regulation prohibiting products made with forced labor. The process involved the participation of nine parliamentary committees and over 3,000 amendments, all of which culminated in the final vote that took place at the end of the 2019-2024 parliamentary cycle, setting the stage for future approval by EU member states scheduled for May 2024.

The process involved the participation of nine parliamentary committees and over 3,000 amendments

The new directive obliges EU and non-EU companies and parent companies with turnover of more than 450 million euros, including their upstream and downstream partners in supply, production, and distribution, to prevent, end, or mitigate their adverse impacts on human rights and the environment. Such impacts include slavery, child labor, labor exploitation, biodiversity loss, pollution, or the destruction of natural heritage.

After the vote, MEP Lara Wolters (S&D, NL) stated: "Today’s vote is a milestone for responsible business conduct and a considerable step towards ending the exploitation of people and the planet by cowboy companies. This law is a hard-fought compromise and the result of many years of tough negotiations. I am proud of what we have achieved with our progressive allies. In Parliament’s next mandate, we will fight not only for its swift implementation but also for making Europe’s economy even more sustainable."

"Today’s vote is a milestone for responsible business conduct", MEP Lara Wolters said.

By adopting this legislation, the Parliament is responding to citizens' expectations concerning sustainable consumption, strengthening the ethical dimension of trade, and the sustainable growth model in accordance with the conclusions of the Conference on the Future of Europe.

Key points

Amendments approved introduce significant adjustments designed to increase the effectiveness of the Directive by comprehensively addressing human rights and environmental concerns. To ensure a comprehensive understanding of the Directive, here are the key amendments and their implications:

• Foundation in EU Values: The amendments reinforce the foundational principles of the Union, highlighting the indivisibility of human and environmental rights and their relation to the Charter of Fundamental Rights of the EU and the Treaty on European Union.
• Emphasis on Environmental Protection: Language emphasizing the importance of environmental protection along with the promotion of European values links environmental policies with the Union's overall strategy.
• Risk-Based Approach and Transition Plan: The firms will have to integrate due diligence into their policies, make related investments, seek contractual assurances from their partners, improve their business plan, or provide support to small and medium-sized business partners to ensure compliance with new obligations. Companies will also have to adopt a transition plan to make their business model compatible with the Paris Agreement global warming limit of 1.5°C.

Companies will also have to adopt a transition plan to make their business model compatible with the Paris Agreement global warming limit of 1.5°C.

• Commitment to a Just Social Transition: The Directive emphasizes the importance of transitioning to sustainable practices that are also socially just, improving the visibility and ownership of these policies among businesses.
• Clarification of Obligations and Responsibilities: The obligations of businesses to protect human rights and the environment are clarified, specifying the need for binding legislation at the member state level to prevent fragmentation.
• Extension of Due Diligence Scope: The scope is expanded to include not only direct operations of companies but also their extended value chains, covering the entire life cycle of products and services.
• Increase in Transparency and Communication: Businesses must report transparently and accessibly on how their operations and business relationships comply with due diligence standards. Member states are mandated to provide companies with detailed online information about their due diligence obligations through practical portals containing the Commission’s guidance. They must also create or designate a supervisory authority to investigate and impose penalties on non-complying firms, including "naming and shaming" and fines of up to 5% of the company's net worldwide turnover. Companies will be liable for damages caused by breaching their due diligence obligations and will have to fully compensate their victims.

They must also create or designate a supervisory authority to investigate and impose penalties on non-complying firms, including "naming and shaming" and fines of up to 5% of the company's net worldwide turnover.

• Promotion of Sustainable Practices: Businesses are encouraged to adopt and promote sustainable practices not only to avoid harm but to act as leaders in innovation and sustainability.
• Responsibilities in High-Risk Situations: Additional measures that businesses must take in high-risk situations, such as in conflict zones or precarious labor conditions, are specified.

Expansion of Scope to Mid-Sized Companies

One of the most significant and far-reaching changes introduced by the amendments to the CSDDD is the inclusion of mid-sized companies within the scope of the Directive. The rules will apply to EU companies and parent companies with over 1,000 employees and a worldwide turnover higher than 450 million euros. Additionally, they will affect companies with franchising or licensing agreements in the EU ensuring a common corporate identity with a worldwide turnover higher than 80 million euros if at least 22.5 million euros were generated by royalties. Non-EU companies, parent companies, and companies with franchising or licensing agreements in the EU that meet the same turnover thresholds will also be covered.

The rules will apply to EU companies and parent companies with over 1000 employees and a worldwide turnover higher than 450 million euros.

It will affect companies with franchising or licensing agreements in the EU ensuring a common corporate identity with a worldwide turnover higher than 80 million euros if at least 22.5 million euros were generated by royalties

This change is fundamental because it significantly broadens the number of companies —estimated to affect about 50,000 businesses— that must comply with the stringent due diligence requirements related to human rights and environmental sustainability.

Previously, the Directive focused on large corporations, which due to their size and scope, have a significant impact on global supply chains and are more visible and susceptible to public and regulatory pressure. By expanding these requirements to mid-sized companies, the Directive creates a more level playing field and ensures that a larger portion of the European business fabric contributes to the promotion of sustainable and ethical practices.

This change recognizes the crucial role that mid-sized companies play in local and global economies and how they can impact human rights and the environment through their operations and supply chains. Extending due diligence requirements to these companies helps close potential gaps that might have allowed negative impacts to go unnoticed or unmanaged properly.

Moreover, this expansion can help prevent sustainability and human rights issues from shifting to less regulated parts of the supply chains. By requiring mid-sized companies to adopt due diligence practices, the Directive reinforces the overall commitment to sustainability and corporate responsibility across the European Union.

Next Steps

With the Directive approved, the focus now shifts to the implementation phase. Here are the upcoming steps necessary to bring the directive into full effect. The Directive now needs to be formally endorsed by the Council, signed, and published in the EU Official Journal. It will come into force twenty days later. Member states will have two years to transpose the new rules into their national laws.

The new rules (except for the communication obligations) will apply gradually to EU companies (and non-EU companies reaching the same turnover thresholds in the EU):

• From 2027. Companies with over 5,000 employees and a worldwide turnover higher than 1,500 million euros.
• From 2028, Firms with over 3,000 employees and a 900 million euros worldwide turnover.
• From 2029. All the remaining companies within the scope of the directive (including those over 1,000 employees and worldwide turnover higher than 450 million euros).

Challenges for Businesses

Implementing this Directive also poses challenges, especially for smaller businesses now falling under the scope of the Directive. These businesses will need to invest in updating their systems and training their personnel to meet the new requirements. However, the European Union and member states are providing resources and support to facilitate this transition, recognizing that the success of the Directive depends on all businesses' ability to implement these changes effectively.

Finally, the extended responsibilities in high-risk situations highlight the importance of proactive supply chain management. By requiring businesses to take additional measures in complicated contexts, the Directive ensures that corporate practices not only meet baseline standards but also aspire to maintain integrity and safety throughout the entire production and distribution process.

The promotion of sustainable practices becomes a critical component of corporate strategy. By encouraging businesses to lead in innovation and sustainability, the Directive not only seeks to mitigate negative impacts but also encourages businesses to pioneer sustainable solutions that can serve as references for the entire industry. This establishes a competitive environment where sustainability becomes a key factor in market differentiation and success.

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