The CSDD Directive is almost upon us. What can we expect?

On 1 June 2023, the European Parliament adopted a negotiating position on draft legislation that would oblige large EU companies to check that their suppliers do not use child labour or harm the environment. If the rule comes into force, companies that are negligent could face various penalties.

The CSDD was originally developed since stakeholders were calling for improved due diligence rules for business operations - hence the name Corporate Sustainability Due Diligence Directive. It will affect companies registered in the EU that employ on average at least 500 people and have a net turnover in the last financial year of more than €150 million, or that employ on average at least 250 people and have a net turnover in the last financial year of more than €40 million - and at least 50% of this turnover comes from a high impact sector. Examples of such industries include agriculture, textiles, forestry and fisheries.  In addition, the Directive also covers companies not incorporated in the EU that have had a net turnover of €150 million in the EU in the last financial year or a net turnover of more than €40 million but less than €150 million in the EU - provided that at least 50% of the worldwide net turnover comes from at least one high impact sector.

Companies or organizations that meet these requirements will be required to demonstrate human rights and their environmental efforts across their business practices. The draft requires companies to identify and, where necessary, prevent adverse impacts of their activities on human rights and the environment. The screening obligation applies to subsidiaries and value chains of organizations, including their suppliers. The Directive also requires large companies to have a plan to ensure that their strategy is compatible with the objectives of the Paris Agreement. In addition, the obligations of company directors are also clearly defined in the process, so that their decisions take even greater account of human rights and environmental considerations.

If companies fail to comply with the CSDD, penalties will be issued in addition to other negative repercussions. Companies will be subject to a fine and subsequent legal action that could ruin the reputation of their business, ultimately impacting future business success. Also, companies who fail to comply with the CSDD will be required to submit additional reports, and civil liability may come into play for cases where being proactive and adhering to the CSDD could have prevented other damages.

The text of the Directive is not yet complete. The Parliament, the Council and the Commission still have to negotiate the final draft. Once adopted, the CSDD will complement European legislation on the protection of human rights and the environment.