CSDDD

Corporate Sustainability Due Diligence Directive

Proposal for a directive of the European Parliament and the Council on corporate sustainability due diligence and amending Directive (EU) 2019/1937

WHAT is the CSDDD?

The CSDDD establishes extensive regulations for companies operating in the EU regarding the respect for human rights and the environment along their value chain. It serves as the European counterpart to the German LkSG but is broader in scope in terms of due diligence obligations and includes civil liability provisions.

Current Legal Status:

On December 1, 2022, the European Council published its position on the European Commission’s directive proposal from February 23, 2022.

A provisional political agreement between the European Council and the European Parliament was reached on December 14, 2023, which, after further adjustments, was adopted on March 15, 2024, by a qualified majority of the member states' permanent representatives. The directive is expected to be transposed into national law by EU member states within two years of its publication (likely by 2026).

WHO is affected and WHEN?

In Germany, the CSDDD will apply to limited liability companies (AG, KGaA, and GmbH), regulated financial institutions, and insurance companies, as well as companies founded under third-country laws (specific details on third-country provisions are not discussed further here).

The CSDDD is expected to apply for the first time two years after its entry into force (likely by 2027). The first group affected includes companies that meet the following criteria in the last two completed fiscal years for which financial statements were prepared:

An average of more than 5,000 employees.
Worldwide net revenue exceeding €1.5 billion.
Three years after its entry into force (or four years after), the directive will extend to companies with:
An average of more than 3,000 employees (or more than 1,000 employees).
Worldwide net revenue exceeding €900 million (or more than €450 million).

Scope:

The CSDDD applies to a company's own operations and its entire value chain, making it broader than the German LkSG.

The value chain generally includes the activities of a company’s upstream and downstream business partners related to the production of goods or the provision of services.

Companies are required to integrate extensive due diligence obligations regarding environmental and human rights issues into their corporate policies. This includes identifying, preventing, mitigating, and addressing actual or potential adverse impacts; establishing and maintaining a complaints procedure; monitoring the effectiveness of their strategies and measures; and publicly reporting on their due diligence obligations.

While SMEs are generally exempt from due diligence obligations, they may be indirectly affected, as affected companies might pass their due diligence requirements down to their suppliers (including SMEs), potentially leading to costs and burdens for these SMEs.

To avoid overlaps in reporting obligations, companies subject to both the CSRD and the CSDDD will not have to meet any requirements beyond those outlined in the CSRD.

Companies subject to the CSDDD but not the CSRD will need to publish an annual statement for the fiscal year on their website. Delegated acts by the Commission will define the content and criteria for reporting.

Civil Liability and Sanctions:

If a company has intentionally or negligently failed to meet its obligations to prevent and address potential adverse impacts, and this results in harm to a natural or legal person, the company is subject to civil liability and full compensation. This civil liability does not affect the liability of subsidiaries or direct and indirect business partners in the company’s value chain.

Member states will establish provisions for sanctions that are effective, proportionate, and dissuasive. In cases of financial penalties, these should be proportionate to the company’s worldwide revenue, with a minimum threshold of 5% of the company’s net revenue. National authorities will be responsible for enforcing sanctions.

Public Procurement:

The agreement of March 15, 2024, includes provisions to use compliance with the directive as a criterion for awarding public contracts and concessions.