The upcoming Corporate Stainability Due Diligence rules (CSDDD) : who is concerned and how to prepare for it ?

I.- CONTEXT AND PURPOSE

On 24 April 2024, the European Parliament officially approved the agreement reached on the final text of the Corporate Sustainability Due Diligence Directive (CSDDD). The Council must now formally approve the text (this is expected in May). Then it will need to be published in the EU Official Journal.

In the context of the Green Deal of the EU, the EU wishes not only for large companies to report on their ESG actions (see Corporate Sustainability Reporting Directive (CSRD)), but also to introduce sustainability due diligence obligations in the supply chain. The overall aim of the CSDDD is to set out a framework for companies to foster sustainable and responsible corporate behavior and to anchor human rights and environmental due diligence in companies’ operations and corporate governance.

Many companies have been anticipating on the CSDDD.

II.- SCOPE

The EU Council has slimmed down the original submitted text proposal by limiting the CSDDD to large companies. Important to note is that these large companies do not necessarily need to be established in the EU.

The CSDDD applies only to companies that fall under one of the following categories. The application of CSDD to these categories of companies is however made subject to different entry into force date (see section V below).

A.- EU companies

The following EU companies will fall within the scope of application of the CSDD:

  1. companies having more than 1000 employees and with a worldwide net turnover of 450 million euros in the last financial year for which annual financial statements have been or should have been adopted, whatever sector they are active in;
  2. companies not falling under i) that are the ultimate parent of a group reaching the thresholds in the last financial year for which consolidated annual financial statements have been or should have been adopted (ultimate parents of ‘very large’ groups); and
  3. companies that entered into- or are the ultimate parent company of a group that entered into- franchising/licensing agreements, and provided that, in the last financial year these royalties amounted to more than 22,5 million euros and the company had or is the ultimate parent company of a group that had a net worldwide turnover of more than 80 million euros (companies with a franchising or licensing business model).

B.- Non-EU companies

The following non- EU companies will fall within the scope of application of the CSDD:

  1. companies that generated a net turnover of more than 450 million euros in the last financial year; and
  2. companies not falling under i) that are the ultimate parent of a group that on a consolidated basis reaches the threshold under i) in the financial year preceding the last financial year (ultimate parents of ‘very large’ groups); and
  3. companies that entered into- or are the ultimate parent company of a group that entered into- franchising/licensing agreements, and provided that, in the financial year preceding the last financial year these royalties amounted to more than 22,5 million euros and the company had or is the ultimate parent company of a group that had a net worldwide turnover of more than 80 million euros (companies with a franchising or licensing business model).

These conditions must be met in each of the last two relevant consecutive financial years for the CSDDD to apply to the relevant company.

Note that pure holding companies are exempted provided they do not engage in taking management, operational or financial decisions which affect the group.

III.- KEY INNOVATIONS

A.- Due diligence obligation

The companies that will fall within the scope of application (the “Companies”) will need to implement effective due diligence policies for identifying, preventing, mitigating, and ending actual and potential so-called “adverse impacts” on environmental matters and human rights violations in the companies’ own operations and of the operations of their subsidiaries, and/or their business partners.

The term "adverse impacts" refers to negative effects, as defined in international agreements approved by Member States.

Negative environmental impacts can include pollution, deforestation, excessive water usage, or harm to ecosystems.

Negative human rights impacts mean either violating specific human rights listed in certain international agreements or mistreating a human right not listed under certain conditions to ensure legal clarity. Common examples include child labor, slavery, and exploiting workers. (see EU Forced Labour Regulation).

Companies must define a comprehensive approach to due diligence and are obliged to demonstrate transparency through detailed and public reporting, which includes disclosing their policies and practices and report about the outcomes of their due diligence activities.

B.- Climate change mitigation

Under the CSDDD, the Companies are required to adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, compatibility of the business model and strategy of the company with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C.

IV.- ENFORCEMENT

The CSDDD imposes member states to foresee appropriate civil liability measures and criminal sanctions to ensure enforcement and deter violations of the CSDDD obligations.

The civil liability of a company will be engaged in cases of damage resulting from intentional or negligent breaches of due diligence. Affected parties then have the ability to pursue claims against companies located at the end of the supply chain within a five-year timeframe.

The CSDDD obliges Member States to adopt rules on criminal sanctions for violations of the CSDDD. National regulators can initiate inspections and investigations, as well as impose sanctions on companies that fail to comply, encompassing fines and public disclosure through a "naming and shaming" approach for non-compliant entities. The CSDDD outlines general rules regarding the criminal sanctions to be foreseen. The maximum fine must be at least to 5% of the company's global net turnover for those that neglect to pay fines following a breach.

V.- ENTRY INTO FORCE

As set out above, the text approved by the EU Council will now need to be review and approved by the EU Parliament and Commission.

The CSDDD shall enter into force on the 20th day following that of its publication in the Official Journal of the European Union with a two-year period to transpose the CSDDD into national law.

The CSDDD allows a phased application schedule of its provisions to the concerned Companies as a result of which the following transition periods apply:

1. three years for :

  • very large EU companies and ultimate parents of ‘very large’ groups that had at least 5000 employees on average and generated a net worldwide turnover of more than 1500 million euros in the last financial year preceding the 3 years from the entry into force of the CSDDD;
  • very large non-EU companies and ultimate parents of ‘very large’ groups that generated a net turnover of more than 1500 million euros in the EU in the financial year preceding the last financial year preceding 3 years from the entry into force of the CSDDD.

2. four years for :

  • very large EU companies and ultimate parents of ‘very large’ groups that had at least 3000 employees on average and generated a net worldwide turnover of more than 900 million euros in the last financial year preceding four years from the entry into force of the CSDDD;
  • vvery large non-EU companies that generated a net turnover of more than 900 million euros in the financial year preceding the last financial year preceding four years from the entry into force of the CSDDD.

3. five years for EU and non-EU companies with franchising or licensing business models (but see the threshold set out above).

VI.- HOW TO PREPARE FOR THE UPCOMING OBLIGATIONS

As follows from the above, the CSDD is still to be formally adopted and published in the Official Journal.

However, once adopted it may have a severe impact on your business, not only if you are one of the targeted Companies, but also if you are one of the companies that fall within the business ambit of the targeted Companies (upstream or downstream), in which case you may need to also prepare yourself for disclosure of information and adaptation of your activities as a result of mitigation measures and contractual obligations imposed by the targeted Companies.

Also in light of the increased sustainability risks following the developments in climate change and human rights litigation, we advise not to wait until CSDDD enters into force before further examining the CSDDD and performing an impact assessment of the upcoming obligations for your business.

A first step is to be aware and understand what this new set of rules implies for your company. Should you have difficulties in understanding the provisions of CSDDD we are happy to explain the new rules to you in layman terms. We can also provide tailored trainings on CSDDD to your staff, including management level, taking into account the specifics of your business.

With our team we can also assist you amongst others with the following next steps:

  • determining whether you are likely to fall under the scope of the CSDDD as a targeted Company or to be otherwise impacted by CSDDD (as a company in the upstream or downstream chain),
  • screening businesses’ activities for potential negative human rights and environmental impacts, and proposing measures to prevent, end or mitigate those impacts;
  • the elaboration and follow up of the next steps to be taken within your business and implementation plan;
  • the elaboration of any legal or contractual documentation to implement the CSDDD obligations (drafting of policies, ethical codes, ethical contract clauses).

We also offer support to supply chain companies (upstream or downstream) with reviewing and negotiation contractual terms that other business are imposing on them in the context of the upcoming CSDDD.

For more information contact us.

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