The European Corporate Sustainability Due Diligence Directive (CSDDD): what happens now?

On 14 December 2023, the Council and European Parliament reached a preliminary agreement on the European Corporate Sustainability Due Diligence Directive (“CSDDD”). The CSDDD is designed to bolster safeguards for the environment and human rights both within the EU and globally.  The CSDDD, as a companion of the Corporate Sustainability Reporting Directive (“CSRD”), fits within the broader objective of the European Unions’ Green Deal, which aims to make Europe climate neutral by 2050 and reduce emissions by at least 55% compared with 1990 levels, by 2030.

Unlike the CSRD, the CSDDD will impose responsibilities on major corporations to identify human and environmental rights abuses in their chain of activities. Companies falling under the CSDDD must identify, mitigate, and stop any harm they cause to human rights and the environment. This will require a drastic change in the way companies currently operate, as due diligence will need to be conducted not only on their own operations, but also on the activities of their subsidiaries and other entities in their value chain with who they have a direct and indirect relationship.

To whom is the CSDDD applicable?

• European companies with >500 employees and >150m net turnover
• European companies in high-impact sectors (e.g. agriculture, textile industry, chemicals) with>250 employees and >40m net turnover of which € 20 mln generated in a ‘high-impact sector
• For non-European companies, only the monetary thresholds apply (i.e. not employees).

The financial sector will only have to apply CSDDD in relation to their own operations and upstream supply chains. In the financial sector, firms will also need to adopt a plan to ensure their business models contribute to limiting global warming to 1.5°C.

Impact on financial services companies:

Following an agreement in December, financial institutions will be excluded from the main requirements of the CSDDD and will only be required to report on their  upstream activities. However, a review clause for a possible future inclusion of the financial downstream sector was added to the Directive. 

Given the crucial role financial institutions have in protecting people and the planet, the (temporary) exclusion of financial institutions from the downstream due diligence obligations under the CSDDD represents in our opinion a missed opportunity to prevent harm in value chains.  It remains to be seen whether the exclusion applied to the financial services sector will be removed in the future. The impact assessment will  take several years and is unlikely to start yet. 

Impact on other (non-financial services) companies:

Medium and smaller companies, while not not directly in scope of the CSDDD may be indirectly affected by this legislation if they are part of the value chain of a company falling within the scope of the Directive. If you would be interested to know more about this “voluntary compliance”, with the CSDDD you can find more information here

What are the transition plan requirements?

Under the CSDDD, companies will be required to adopt transition plans for climate change mitigation and ensure that their business model and strategy are compatible with the transition to a sustainable economy. These transition plans should be reviewed every 12 months and contain a description of the progress the company has made towards achieving their targets.

To avoid duplicating reporting obligations, companies that are already complying with the CSRD are exempted from the obligation to adopt a climate transition plan (as they are already required to have a transition plan in accordance with ESRS E1-1). 

For companies with more than 1000 employees, the CSDDD includes the provision that an appropriate policy should be in place to promote the implementation of the transition plan for climate change mitigation. This may include providing financial incentives to members of the administrative, management, or supervisory bodies involved if the targets of the transition plan are achieved.

Private and public enforcement

If damage is caused to a natural or legal person stemming from human rights violations or environmental harm, the CSDDD provides a civil liability mechanism to ensure that victims have the right to claim full compensation for the damage. A company cannot be held liable if the damage was caused only by its business partners in its value chain.

The CSDDD also provides a public enforcement mechanism whereby supervisory authorities have the power to launch inspections and impose penalties and fines that shall not be less than 5% of the net worldwide turnover of the company in the financial year preceding the fining decision.

What are the next steps?

Following agreement in December, the final draft text of the CSDDD was published on 30 January. The Council vote was scheduled to take place on the 9 February but was taken off the agenda at the last minute following concerns that Germany and Italy would abstain. A new vote is yet to be scheduled in Council, but it will need to be held soon if  the CSDDD is going to be passed under this Parliament. Time is pressing as work on legislation is expected to end soon with the European Parliament holding its last session in April, ahead of elections in June.

Once the  text of the CSDDD is formally adopted by both the Council and the European Parliament, it will be published in the Official and enter into force. Member States will then have 2 years to transpose the directive into national law. 

• Companies that have more than 1000 employees on average and generated a net worldwide turnover of more than 300 million EUR in the last financial year preceding will need to comply with the directive within three years following publication in the Official Journal.
• Other companies that are falling into scope will have four years to comply with the directive al. 
• Companies in high risk sectors, will have five years to comply.

How can Projective help?

The CSDDD is unlikely to come into force until 2026 at the earliest but given the political moves to make progress in this area, financial services firms can already start thinking about how some of their existing practices could be improved to align with the overall trajectory of the CSDDD, even if downstream activities are currently still excluded from the scope. Projective Group can help you to understand the requirements and how it may impact your organisation. Feel free to reach out to us: