State of play

On 23 February 2022, the European Commission published a proposal for a directive regulating corporate due diligence obligations regarding human rights and the environment in value chains. The aim of the Directive on Corporate Sustainability Due Diligence (CSDDD) is to oblige companies operating within the EU to respect human rights and the environment in global value chains moving forward. The planned law also aims to integrate due diligence processes more closely into governance structures and bolster the level playing field and legal certainty at EU level.
2023 brought a trilogue between the EU Commission, EU Parliament and European Council, where the three bodies negotiated how to adapt the draft directive of 23 February 2022 taking into account the three positions prior to adoption. On 14 December 2023, the EU Parliament and the European Council reached a provisional agreement on the CSDDD and, following several failed attempts at a final vote on the draft directive, a sufficient majority of EU member states adopted a compromise text on 15 March 2024.

The directive was adopted by the EU Parliament in Strasbourg on 24 April 2024 and by the EU member states on 24 May 2024. The CSDDD was published in the Official Journal of the European Union on 5 July 2024 and entered into force 20 days later.

It now falls to the EU member states to transpose the CSDDD into their respective national laws within a two-year period, namely by 26 July 2026. In the case of Germany, it seems likely this will be achieved by amending the German Supply Chain Act (LkSG).

Who is affected?

• The agreement contains the following key points of relevance to the scope of application:
  Three years after entry into force: EU companies and parent companies with a headcount of more than 5,000 and a global turnover of more than EUR 1.5 billion. For non-EU companies, a turnover generated within the EU reaching the same threshold.
• Four years after entry into force: EU companies and parent companies with a headcount of more than 3,000 and a global turnover of more than EUR 900 million. For non-EU companies, a turnover generated within the EU reaching the same threshold.
• Five years after entry into force:
  • EU companies and parent companies with a headcount of more than 1,000 and a global turnover of more than EUR 450 million. For non-EU companies, a turnover generated within the EU reaching the same threshold.
  • Companies with franchising agreements based in the EU with a turnover higher than EUR 80 million if at least EUR 22.5 million was generated by royalties.
  • For non-European companies with franchising agreements, the thresholds relate to turnover generated within the EU.

What are the key points of the agreement? 

• Definition of the chain of activities: The chain of activities includes both the upstream activities as well as certain elements of the downstream value chain. With regard to the downstream value chain, transport, storage and distribution are taken into account only for direct business relationships, whereas product disposal is entirely exempt from audit.
• Climate Transition Plan: Companies must adopt a plan that ensures both their business model and strategy are compatible with the goal of limiting global warming to 1.5°C as set out in the Paris Agreement.
• Financial sector: The sector is temporarily excluded from the scope of the Directive.
• Civil liability: The draft law proposes a five-year period within which affected parties (including trade unions and civil society organisations) may assert their claims. Should non-governmental organisations wish to bring an action, their ability to do so is limited to the applicable national civil procedure law. 
• Sanctions: Companies that fail to comply with the prescribed due diligence obligations will be fined up to 5% of their global net turnover. The member states appoint a supervisory authority to monitor, investigate and sanction companies. 

What must companies report on?

Companies report on their compliance with due diligence obligations as part of their CSRD report. This includes the extent to which their activities impact negatively on human rights and the environment, including slavery, child labour, worker exploitation, biodiversity loss, pollution and the destruction of natural heritage, as well as how companies address, prevent, mitigate and account for both actual and potential negative impacts on the environment and people associated with their operations.