How has the scope been scaled back?

The version of the CSDDD approved by COREPER in March 2024 covers fewer companies than the text that was originally agreed in December 2023. Indeed, the applicability thresholds were increased across the board, and the approach of setting lower thresholds for companies operating in high-risk sectors was removed. According to data analyzed by the Centre for Research on Multinational Corporations (see here), the reduction of scope leads to 5,421 companies being covered by the Directive, which is a reduction of about 60% compared to the rules agreed on in December 2023. 

Despite this, the breadth of the impact of the CSDDD should not be underestimated. First, the scope as approved by COREPER will still cover a significant number of companies, including both those incorporated under the law of a member state (EU companies) and those incorporated under the laws of a third country (non-EU companies). Second, both the scope itself and the approach relating to high-risk sectors may well be reintroduced at a later stage, pursuant to a future review of the CSDDD scheduled six years after its entry into force. Lastly, small and medium-sized enterprises and other large companies that do not meet the thresholds, although not included within the CSDDD's scope, will clearly still be indirectly affected by its provisions, since the CSDDD imposes — among other obligations — value chain due diligence obligations (see here for more details), and many of those smaller companies are bound to be contractors or subcontractors of the companies that are in scope.

Therefore, despite the reduced ambitions of the March 2024 text, the CSDDD is still bound to have a significant impact on markets globally, requiring adaptation by most if not all operators.

Overview of the scope

In general terms, we can identify three groups of companies that fall within the scope of the CSDDD, as follows.

How to calculate the relevant thresholds

The notion of "net turnover" is identical to the one used in the EU Accounting Directive. Thus, for most EU companies, it covers "amounts derived from the sale of products and the provision of services after deducting sales rebates and value added tax and other taxes directly linked to the turnover." For non-EU companies, it essentially refers to the notion of revenue used for their own financial statements.

While the CSDDD does not define its own notion of what constitutes an "employee," it remains prescriptive about the types of employment relationships to be counted, and how to count them, for the purposes of the employee thresholds applicable to EU companies, as follows:

• Part-time employees must be included on a full-time equivalent basis.
• Seasonal workers must be included in proportion to the number of months of employment.
• Temporary agency workers and posted workers (from temporary employment undertakings or placement agencies) should be considered as employees of the user company.
• Posted workers should be considered as employees of the sending company.
• Other workers in “non-standard forms of employment” should also be included in the calculation of the number of employees insofar as they meet the criteria for determining the status of a worker established by the Court of Justice of the European Union.

Note that a company or group of companies (whether EU or non-EU) must meet the abovementioned (employee and turnover) thresholds for two consecutive financial years to be subject to the obligations set forth in the CSDDD. However, once it has been applicable for one year, the CSDDD will only become inapplicable if these thresholds cease to be met for each of the last two relevant financial years. This provides some stability to the applicability of the CSDDD.

Lastly, one of the key notions of the applicability of the CSDDD for non-EU companies is the notion of turnover "generated in the Union." It is worth noting that this concept is not defined by the CSDDD and remains largely ambiguous. There is little doubt that this notion will be the focus of much analysis and, hopefully, regulatory guidance.

What about asset holders/nonoperational holding companies?

Since the Group 2 category focuses on ultimate parent companies, the CSDDD has made specific provisions for cases where such ultimate parent companies are not an operational company. A nonoperational ultimate parent company whose main business activity is to hold shares in operational subsidiaries, and which is not involved in management, operational or financial decisions affecting the group (or one or more of its subsidiaries) may be exempted by the competent national supervisory authority from its obligation to comply with the CSDDD.

In other words, such parent companies may be allowed to "delegate" their CSDDD obligations to one of their operational EU subsidiaries, under certain conditions. If exempted, the ultimate parent company nevertheless remains jointly liable with the designated subsidiary if the subsidiary does not comply with its obligations under the CSDDD. As such, this exemption rule may have an effect on the way that companies organize their internal group structures, including the distribution of responsibilities in terms of management, operational and financial matters. The precise effect on a company's group must be assessed on an individual basis, however.

Timeline for applicability

Member states must transpose the CSDDD into national law within two years from its entry into force. However, all covered companies are given between one and three more years to prepare. 

Indeed, under the March 2024 version of the CSDDD, a slower phase-in of the applicability is foreseen than under the originally agreed December 2023 version. The CSDDD will start to apply to in-scope companies as follows.

Three years after the entry into force of the CSDDD, likely in 2027, the (national transposition of the) CSDDD must apply to the following:

• EU companies that fall within Groups 1 or 2, had more than 5,000 employees on average and generated a net worldwide turnover of more than EUR 1,500 million in the last financial year preceding the three-year anniversary of the entry into force of the CSDDD
• Non-EU companies that fall within Groups 1 or 2 and generated a net turnover of more than EUR 1,500 million in the EU in the financial year before the last financial year preceding the three-year anniversary of the entry into force of the CSDDD

Four years after the entry into force of the CSDDD, likely in 2028, the (national transposition of the) CSDDD must apply to nthe following:

• EU companies that fall within Groups 1 or 2, had more than 3,000 employees on average and generated a net worldwide turnover of more than EUR 900 million in the last financial year preceding the four-year anniversary of the entry into force of the CSDDD
• Non-EU companies that fall within Groups 1 or 2 and generated a net turnover of more than EUR 900 million in the EU in the financial year before the last financial year preceding the four-year anniversary of the entry into force of the CSDDD

Five years after the entry into force of the CSDDD, likely in 2029, the (national transposition of the) CSDDD must apply to all other EU and non-EU companies covered by the CSDDD.