Today, the European Council announced the approval by member states of the Corporate Sustainability Due Diligence Directive (CSDDD), marking the final step in adopting legislation that mandates large companies to address their negative impacts on human rights and the environment across their value chains.
The directive, initially proposed by the European Commission in February 2022, requires companies to identify, assess, prevent, mitigate, address, and remedy impacts on human rights and the environment, such as child labor, pollution, deforestation, and ecosystem damage in their supply chains and certain downstream activities.
Despite the EU Parliament and Council reaching an agreement on the new legislation in December 2023, the Council’s approval vote was postponed in January due to Germany’s threat to withhold support, citing concerns over the regulatory and legal impact on companies. Further uncertainty arose when Italy reportedly withdrew its support, leading to the legislation’s failure to pass in late February. France made a last-minute attempt to reduce the scope of the new rules to apply only to the largest companies in the EU, which ultimately did not succeed.
After significant compromises, the Council approved a revised Corporate Sustainability Due Diligence Directive (CSDDD) in March. Key changes included raising the thresholds for companies covered by the legislation to those with at least 1,000 employees (up from 500) and revenue greater than €450 million (up from €150 million). These adjustments reduced the number of companies within the scope of the CSDDD by approximately two thirds. Additionally, lower thresholds previously set for high-risk sectors were eliminated, although there is potential for their reconsideration in the future.
Further adjustments to the Corporate Sustainability Due Diligence Directive (CSDDD) included a phased implementation schedule: starting in 2027 for companies with over 5,000 employees and revenue exceeding €1.5 billion, followed by those with more than 3,000 employees and revenues of over €900 million in 2028, and extending to all other applicable companies by 2029. Additionally, the revised CSDDD eliminated the previous requirement for companies to incentivize the implementation of climate transition plans through financial means.
Despite initial challenges and revisions that narrowed its scope, including raising thresholds for company size and revenue, the CSDDD now sets phased implementation starting from 2027 for large companies, with supervisory authorities tasked to enforce compliance and impose penalties.
Dated: May 24, 2024
