The EU's Corporate Sustainability Due Diligence Directive (CSDDD) will pave the way for a new era of corporate due diligence obligations.
Some of the key changes in the final version represent a welcome reprieve for some – the number of institutions which must comply was reduced, financial institutions had a major win (read on to learn more about that), practical mechanisms were included to streamline compliance requirements, the EU company director ESG duties were removed altogether and liability thresholds are now more sensible.
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A quick refresher in 3 diagrams
Diagram 1... The 9 CSDDD due diligence steps
Diagram 2... ‘Chain of activities’ is upstream and downstream business partners (and not just your subsidiaries)
Diagram 3... The last resort... the last place you want to end up, but sometimes karma is... a bit cruel
If none of the following (and these are just some of the required actions) prevent or mitigate to the required extent a potential adverse impact or bring to an end or minimise to the required extent an actual adverse impact:
• prevention action plans for potential adverse impacts
• corrective action plans and proportionate measures for neutralising or minimising actual adverse impacts
• contractual assurances from your direct business partners (and from their business partners) to comply with the company’s code of conduct and prevention and corrective action plans
• financial or non-financial investments or upgrades
then it is Last Resort time.
Some of the key changes in the final version
1. Higher employee count and turnover thresholds
In response to strong opposition from business and EU Member States, the CSDDD will apply to fewer companies. The final version has a higher threshold for turnover and employee count which must be met over 2 consecutive financial years.
Let’s break this down a little for EU and non-EU Companies, and franchises.
EU Companies
Employee count: The initial proposal for in-scope EU companies was a minimum of 500 employees. The EU Parliament voted in June 2023 to lower it to 250. In response to strong opposition, the EU Parliament ultimately approved a 1000 minimum.
Turnover: A similar chain of events occurred in relation to the minimum global turnover thresholds. The initial proposal was EUR150 million. The EU Parliament then tried to lower it to EUR40 million. The final threshold settled at EUR450 million.
Non-EU companies
Only turnover, and only that generated in the EU, will be considered for non-EU companies. The minimum turnover threshold has also increased from EUR150 million to EUR450 million.
Franchises – a new, discrete threshold
The final CSDDD introduces a separate threshold for companies/ultimate parent companies that enter into franchising or licensing agreements in the Union in return for royalties with independent third-party companies, where those agreements ensure a common identity, a common business concept and the application of uniform business methods.
For EU company/ultimate parent company franchising/licensing agreements in the EU, the total royalties must exceed EUR22.5 million and the company/ultimate parent company must also have a minimum worldwide turnover of EUR80 million.
For non-EU company/ultimate parent company franchising/ licensing agreements in the EU, the total royalties must exceed EUR22.5 million in the EU and the company/ultimate parent company must also have a minimum turnover of EUR80 million in the EU.
Earlier versions sought to include royalties from franchising/licensing agreements in the EU turnover calculations (ie it counted towards the turnover calculation).
2. Longer phase-in period; more time to prepare
The CSDDD will apply first to the largest in-scope companies and gradually to smaller companies, over a 3, 4 and 5-year period (same 3, 4 and 5-year period as the Parliament Amendment, but longer than the 2 and 4-year period in the initial proposal).
3. Financial institutions – only upstream now, more may come
Regulated financial undertakings (aka financial institutions) will now only need to perform due diligence on upstream activities - downstream business partners receiving services and products are expressly excluded.
Things may change in the future. The EU Commission is required to submit a report on the necessity of additional tailored requirements for financial institutions within 2 years.
4. Targeted provisions for institutional investors and asset managers removed
Institutional investors and asset managers enjoyed bespoke, softer obligations in the previous version. These were removed in the final version – institutional investors and asset managers are now treated like all other in-scope financial undertakings, whose obligations only extend to the upstream chain of activities.
Alternative Investment Funds and Undertakings for Collective Investment in Transferable Securities continue to be expressly excluded.
5. Non-operating ultimate parent holding companies can delegate obligations to operating subsidiaries
An ultimate parent holding company can be exempted from its due diligence obligations if:
- it is a holding company
- it does not engage in taking management, operational or financial decisions affecting the group or its subsidiaries
- one of its EU subsidiaries is designated to fulfil the due diligence obligations and
- it obtains the necessary exemption.
The designated subsidiary must have the necessary means, legal authority, information and documents to fulfil the obligations of the ultimate parent company.
However, this is not an ‘all-clear’ scenario: the ultimate parent company will remain jointly liable with the designated subsidiary.
6. Parent can perform due diligence obligations for the whole group
A parent company can also elect to perform the due diligence obligations of the whole group in certain conditions.
7. Companies will need a transition plan – that hasn’t changed!
In line with the broader aim of limiting global warming to 1.5°C, in-scope companies must adopt a transition plan for climate change mitigation, including time-bound targets, key actions and explanation of investments and funding supporting the transition plan implementation.
8. Tougher harmonisation requirement for EU Member States
EU Member States can do more, but not less! The final CSDDD prohibits EU Member States from introducing in their national law any obligations diverging from the CSDDD, unless they are more stringent. The wording is clearer than the Parliament Amendment which required the coordination of the EU Commission and EU Member States in light of harmonisation, to ensure a level playing field.
9. Independent third-party verification: who can be the ‘referee’?
Companies may use independent third-party verification to support the implementation of due diligence obligations.
Independent third-party verifiers are:
The EU Commission will issue guidance on the criteria and methodology for companies to access third-party verifiers.
10. EU company director ESG duties and remuneration link cut completely
EU company directors’ ESG duties have been removed completely, along with the linking of their variable remuneration to the company’s CSDDD transition plan for climate change mitigation.
11. Liability now only for intentional/negligent breach
An in-scope company will become liable to fully compensate victims under the CSDDD if it:
- intentionally or negligently fails to comply with its CSDDD obligations, and
- as a result of the failure, [it] caused damage to a natural or legal person’s legal interest protected under national law.
This is more lenient than earlier versions.
12. Penalties: fines and shame
The maximum pecuniary penalty remains the same: not less than 5% of the net worldwide turnover of the company in the financial year preceding the fining decision - the higher the company turnover, the higher the maximum fine.
If a company fails to comply with the pecuniary penalty within the time limit, EU Member States must issue a public statement detailing the company responsible for the infringement and the nature of the infringement. Previously mandated penalties (such as suspending products from circulation or export) have been removed, giving flexibility to EU Member States to impose those additional penalties they consider appropriate. Those awarding public and concession contracts can still take into account compliance as part of the award criteria.
The wrap up
The CSDDD will make ESG ‘real’ for EU and non-EU in-scope companies, and all of their business partners in their chain of activities. The focus on ‘due diligence’ is about making businesses responsible for identifying and preventing impacts of activities, as well as providing remediation for those impacts, and engaging with stakeholders and communicating publicly.
Now is the time to ‘skill up’ and prepare
The CSDDD obligations will start to bite in 2027. Now is the time to prepare. This includes:
Want to know more about your CSDDD obligations and other ESG matters? Check out our explainer and get in touch! We are passionate about ESG and keen to discuss and generate new ideas with you.
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