Essential Guide to CSDDD (Corporate Sustainability Due Diligence Directive)
- esgnewsindia
- Nov 11, 2024
- 5 min read
Contents
What is CSDDD?
The Corporate Sustainability Due Diligence Directive (CSDDD) is a piece of ESG regulation introduced by the European Union that became law on 25 July 2024. The aim of the Directive is to foster sustainable and responsible corporate behaviour in companies’ operations and across their global value chains.
CSDDD seeks to achieve this by introducing introducing due diligence requirements on companies, so they need to assess and address human rights and environmental risks not only in their own businesses, but also in the companies they work with (for example in their supply chain).
The full EU legal text for CSDDD is here.
The EU official webpage for CSDDD is here.
What exactly does it require?
CSDDD establishes a ‘corporate due diligence duty’ for in-scope companies. There are several different elements to this, but the overall expectation is that companies identify and address potential and actual adverse human rights and environmental impacts in the company’s own operations, their subsidiaries and, where related to their value chain(s), those of their business partners.
More specifically, under the duty, companies will need to:
Implement a 'risk-based' approach to human rights and environmental due diligence (Article 5);
Incorporate due diligence into relevant policies and risk management frameworks (Article 7);
Identify and evaluate actual or potential adverse impacts, and prioritize these impacts when necessary (Articles 8 and 9);
Take steps to prevent, and where prevention isn't immediately possible, mitigate potential adverse impacts, as well as ending actual adverse impacts and minimizing their extent (Articles 10 and 11);
Provide effective remediation for actual adverse impacts (Article 12);
Ensure meaningful engagement with stakeholders (Article 13);
Set up and maintain a system for notification and complaints (Article 14);
Monitor the effectiveness of due diligence policies and actions (Article 15);
Publicly disclose information about due diligence activities (Article 16);
Adopt and execute a climate transition plan (Article 22); and
Appoint an authorized representative (Article 23).
In addition, the Directive sets out an obligation for large companies to adopt and put into effect, through best efforts, a transition plan for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement as well as intermediate targets under the European Climate Law.
Who needs to report?
CSDDD applies to large companies operating in the EU, with specific thresholds based on revenue, size, and industry:
EU-based companies with more than 1000 employees and a net turnover of over €450 million.
Non-EU companies operating in the EU with a net turnover of over €450 million.
When does it come into force?
The CSDDD must be incorporated into national law by EU Member States by 26 July 2026. The rules will then apply to companies based on a staggered timeline, outlined below, to allow sufficient time for preparation. As a result, it will be several years before the full implementation of the new rules.
The phased application of these rules will help businesses prepare for compliance. This means that it will take a few years before the new requirements are fully enforced.
Timeline for Application
Category | Net Turnover Threshold | Number of Employees | Date of Application |
EU companies | EUR 1,500 m (global) | 5,000 | 26 July 2027 |
EUR 900 m (global) | 3,000 | 26 July 2028 | |
EUR 450 m (global) | 1,000 | 26 July 2029 | |
Non-EU companies | EUR 1,500 m (in EU) | N/A | 26 July 2027 |
EUR 900 m (in EU) | N/A | 26 July 2028 | |
EUR 450 m (in EU) | N/A | 26 July 2029 | |
EU Franchisors/Licensors | Turnover: EUR 80 m (global) | N/A | 26 July 2029 |
Royalties: EUR 22.5 m (global) | N/A | 26 July 2029 | |
Non-EU Franchisors/Licensors | Turnover: EUR 80 m (in EU) | N/A | 26 July 2029 |
What happens if I don’t report?
Failure to comply with CSDDD can result in significant penalties, including:
Fines: Companies may face financial penalties for non-compliance, which could be proportional to their revenue and the severity of the non-compliance.
Legal Action: Individuals or organizations affected by a company’s operations may pursue legal action if the company fails to meet its obligations under the directive.
Is this the same as CSRD?
No, the Corporate Sustainability Reporting Directive (CSRD) and CSDDD are related but distinct regulations. While both focus on sustainability, CSRD focuses on the reporting of sustainability performance and financial disclosures, including environmental, social, and governance (ESG) factors, while CSDDD goes a step further by requiring businesses to actively manage and mitigate the risks of human rights violations and environmental harm throughout their supply chains.
Are financial institutions included in CSDDD?
Yes and no.
Regulated financial undertakings that exceed the thresholds established by the CS3D Directive will be subject to due diligence obligations concerning the 'upstream' part of their activities. Specifically, they will be required to identify and take appropriate action to prevent or address any actual or potential adverse impacts of their operations on human rights and the environment.
However, the final version of the CS3D Directive excludes the 'downstream' activities of financial undertakings. As a result, regulated financial institutions will not be held accountable under the CS3D Directive for the actions of third parties they finance or invest in.
Since these downstream activities represent a the most significant part of financial institutions’ operations, effectively this operates as a carveout for financial institutions from most of CSDDD’s requirements.
However, a review is scheduled within the next two years to assess whether to include downstream activities within the scope of the directive.
How should I prepare to start reporting?
Preparing for CSDDD compliance involves several key steps:
Conduct a Risk Assessment: Begin by assessing the environmental and human rights risks in your operations and supply chains.
Set Up Due Diligence Procedures: Implement systems to monitor, manage, and address these risks.
Engage with Suppliers: Work with suppliers to ensure they meet the sustainability standards set by the directive.
Develop Reporting Processes: Prepare for detailed reporting on your due diligence efforts, including tracking and documenting actions taken to mitigate risks.
Train Staff: Ensure key personnel are trained in sustainability and due diligence processes to comply with the directive.
How long will reporting take?
The amount of time required for reporting depends on the complexity and size of the business, as well as the maturity of its sustainability efforts. Companies will need time to establish due diligence systems, monitor compliance, gather necessary data, and prepare comprehensive reports. It is advisable to start preparations early—ideally 6 to 12 months before the 2025 compliance deadline—to ensure enough time for data collection, analysis, and reporting.
Does this apply to non-EU companies?
Yes, non-EU companies with a net turnover of over €450 million are captured. This includes companies that generate significant revenue within the EU market, regardless of where they are headquartered.
Who is policing this?
The European Commission will oversee the enforcement of CSDDD, working with national authorities in EU member states. These authorities will be responsible for ensuring that businesses comply with the directive and imposing penalties for non-compliance. Companies may also be subject to private lawsuits in cases where individuals or groups affected by their operations seek remediation for violations.
Is it going to change?
While CSDDD is still in the process of being finalized, it is expected that it will evolve over time as companies and stakeholders provide feedback. The EU may amend or refine the rules based on the challenges businesses face in implementing them, or in response to new sustainability developments or emerging risks.
Where can I find out more information?
You can find more information on CSDDD on the official page here.