In the last few years, the European Union (EU) has made sweeping changes to its policy to target climate change. In 2022, the European Commission proposed the Corporate Sustainability Due Diligence Directive (CSDDD) to target large companies' impact on the environment and human rights, and in April 2024, it was passed by the European Parliament.

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In this article, we’ll go through the intricacies of the CSDDD, what it requires, and how companies can better prepare for it. 

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What is the CSDDD?

The CSDDD isn’t just an unnecessarily long initialism to spell out each time (see-es-es-dee-dee-dee), it is a proposed legislation in the EU that aims to enforce environmental and human rights regulation by targeting large companies and its subsidiaries, business partners, and supply chain. 

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The directive will introduce specific and comprehensive requirements for companies to identify, prevent, and mitigate any impact of its operations and activities on the environment and human rights. Companies must conduct due diligence on its operations and those of its partners and suppliers. 

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Many EU member states have national due diligence requirements and legislation targeting environmental and human rights abuse. The CSDDD brings the entire block under a unified policy and make it mandatory for all member states to adopt it. 

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What does the CSDDD entail?

After a lot of negotiations and discussions, the CSDDD was finally passed on April 24th 2024. The directive clearly lays out the eligibility of the companies, the requirements, and the penalties for non-compliance. 

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Sounds scary, but here are the points the CSDDD requires of companies that come under the directive’s scope:

• Identify negative impact on environment and human rights – Conduct due diligence on both direct and indirect operations to identify any adverse impact they have on the environment or human rights. 
• Mitigate the risk of violation and negative impact – Create an action plan with a timeline to address any identified risks that may result in environmental damage or human rights violation. 
• Create grievance mechanisms – Establish a way to provide grievances for any stakeholders if their rights are violated. 
• Align policy with the Paris Agreement – Create plans and take measures to curb emissions in line with the Paris Agreement.
• Make due diligence public – share sustainability reports with all the stakeholders and the public. 

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In the event of a violation of the directive, the companies may be fined. These fines will be based on the company turnover (i.e., the more you earn, the greater the fine). 

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Who does the CSDDD impact?

Much like the EU’s Corporate Sustainability Reporting Directive (CSRD), the CSDDD scope also casts quite a large net. That means tens of thousands of businesses will come under scope. More importantly, the directive targets both EU and non-EU companies. 

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The directive will be applicable in increments, with the first conditions applicable within two years and the remaining conditions applicable within three years of adopting the legislation. A nice slow transition to ease the impact. 

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But, to make things even clearer, here’s who will be under the scope of the CSDDD and when:

• EU companies with over 500 employees and an annual turnover of over €150 million, at least for two consecutive financial years (applicable after two years of legislation passing).
• Non-EU companies operating in the EU with a net revenue of €150 million generated in the EU (applicable after two years of legislation passing).
• EU companies with over 250 employees and an annual turnover of over €40 million generated in high-impact sectors like fashion, agriculture, oil, and minerals (applicable after three years of legislation passing).
• Non-EU companies with an annual revenue of more than €40 million from high-impact sectors (applicable after three years of legislation passing).

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The directive will impact over 13,000 EU and over 4,000 international companies when it comes into effect. Be sure you’re on the right side of the fence to prepare adequately. 

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What about small businesses, are they in the clear with the CSDDD?

Yes. And no (oh boy). While the CSDDD primarily targets larger companies, it will indirectly affect smaller businesses (small-to-medium enterprises - or SMEs) as well. The directive includes supporting measures for smaller companies, and so it is essential for SMEs to consider, as they could be part of the supply chains of larger companies needing to comply with the CSDDD.

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Therefore, while smaller companies may not need to meet the same stringent requirements as larger firms, they will likely need to adapt their practices to continue doing business with larger, regulated entities. This might include providing data or complying with sustainability criteria set by their larger partners.

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The intention is to mitigate sustainability risks and help smaller companies benefit from the long-term strategic advantages of decarbonisation.

When will the CSDDD come into effect?

Despite it being passed in April 2024, it won’t fully go into effect until 2026. However, affected companies may have to start implementing changes from the very next year (i.e., 2025). 

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Companies will be required to complete due diligence and set goals for 2030 and then update them every 12 months. The legislation will go into effect in stages, with most large companies affected at the beginning and more so after three years of the legislation’s passing date. So, all affected companies must take measures and complete the required due diligence by 2027. 

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Also, according to the draft of the directive, public financial services will only be required to conduct due diligence for upstream partners. However, all other companies must account for both upstream and downstream partners. 

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Preparing for new legislation

Companies that come under the directive's scope, whether based in the EU or not, should take a preemptive approach and begin taking the right steps. Most of the same companies are already required to report environmental, social, and governance (ESG) data as per the CSRD, so conducting due diligence shouldn’t be so difficult. 

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If you’re a CEO, CFO, or any other company executive that comes under the directive’s scope, sit down with your ESG manager and get planning!

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Want to learn more about sustainability regulations in the EU? Check out comundo’s full blog page.

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