Key highlights
1. Expansive scope: Approximately 13.000 companies inside the EU and 4,000 additional companies incorporated outside the EU are in scope of the CSDDD.
2. A strengthened climate mandate: Next to its protection of human rights, the CSDDD adopts a holistic approach to climate protection. Companies will have to develop plans aligning their business strategies with sustainability and limiting global warming to 1.5 degrees Celsius.
3. From supply chain to value chain: The scope of due diligence obligations under the CSDDD extends to the entire value chain, upstream and downstream.
4. Liability and penalties: The agreement provides for a civil liability regime. Victims can claim compensation from a company in a European court if they can prove that they suffered damage because of a violation of human rights or environmental standards by said company. National authorities can also impose penalties, such as fines up to 5% of the annual group turnover.
In detail
The current draft directive sets out a wide scope of application in Article 2. Many businesses will be affected by the CSDDD. The draft directive encompasses both EU-based companies and companies from third countries, provided certain thresholds of employees and turnover are met. According to the explanatory memorandum of the initial proposal by the European Commission, approximately 13,000 companies inside the EU and approximately an additional 4,000 companies incorporated outside the EU will be in scope.
Companies constituted under the law of an EU Member State would be in scope of the directive if they meet the thresholds of Group 1 or Group 2, as outlined in the table below:
The CSDDD also provides for an applicability of its obligations to non-EU companies, if they meet the relevant turnover thresholds within the EU.
The material scope of the CSDDD encompasses the entire value chain, upstream and downstream.
- The upstream value chain includes all activities of a company related to product manufacturing, such as raw material extraction, and provision of services.
- The downstream value chain includes all activities conducted by business partners regarding distribution, transportation, storage, and disposal.
Companies will be required to undertake due diligence to identify, where necessary also prevent or mitigate potential adverse impacts, and to end adverse impacts of their activities. Such adverse activities include slavery, child labor, labor exploitation, environmental degradation, pollution, and biodiversity loss. In-scope companies will also have to monitor and assess the impact of their value-chain partners including e.g. suppliers, sales, transport, distribution, storage, and waste-management. Companies will further have to develop plans aligning their business strategies with sustainability and limiting global warming to 1.5 degrees Celsius (Paris Climate Agreement).
The CSDDD includes the possibility of civil liability. It enables affected parties to directly file claims against companies for damages stemming from human rights violations or environmental harm within the value chain.
Another enforcement mechanism provided for by the CSDDD are sanctions imposed by the competent national authorities in case of a violation of due diligence obligations. They may include fines of up to 5% of the annual group turnover.
Key to comply with the national laws implementing the CSDDD at EU Member State level going forward will be the establishment of a risk management system that allows for regular risk analyses as well as prevention and remediation mechanisms, including an internal complaint procedure for disclosing human rights and environment-related risks and violations.
Outlook
The negotiations on the CSDDD have reached the finishing line. It will now be officially adopted by the Council of the Union and the European Parliament, before entering into force in the very near future.
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