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EU finally decided on CSDD Directive
After long debates, multiple drafts and adaptations, the Corporate Sustainability Due Diligence Directive (CSDDD), also known as CS3D or EU supply chain act, was adopted by the EU Council on 15.3.2024 and the JURI Committee on 19.3.2024. The JURI Committee of the EU Parliament agreed on the current text with 20 votes in favour and 4 votes against. Another vote in Strasbourg end of April is considered the last one for the EU Parliament followed by a final approval by the EU Council before the directive can be published in the Official Journal and then enter into force.
The aim of the directive is to improve human and environmental standards along the supply chain and to promote responsible corporate behaviour. Even though some companies have already been dedicated to solving this issue, companies have not comprehensively been held responsible for negative impacts along the value chain and there were no legally binding duties in this regard. The CSDDD will change this: Companies will be obligated to meet specific criteria in upstream and partially downstream activities. They must evaluate their value chains and act in case critical working conditions or environmentally harmful processes occur. The criteria are supposed to ensure that the production of goods offered in the EU meets minimum human and environmental standards.
Review: Debates and viewpoints
The idea of the CSDDD was born many years ago when this kind of directive was brought up by various institutions and governments on EU level. In some European countries, comparable regulations have already been implemented at a national level. In February 2022, the first CSDDD proposal was submitted by the EU Commission to the EU Parliament and EU Council. It was not until December 2023 that a compromise was reached and a CSDDD Draft was published, which the Council, the Commission and the EU Parliament have apparently agreed on. However, shortly before the final CSDDD vote, the hesitation of the FDP in Germany triggered concerns in several countries.
One of the biggest points of criticism was the possibility of civil liability as a consequence for non-compliant companies, which is excluded in the German Supply Chain Act. There were worries about companies stopping their business activities in Europe due to excessive bureaucracy, withdrawal from developing countries, or the lack of alternative raw materials. Possible implementation problems, burdens on SMEs and a shift from the political to the economic level were also mentioned as counter-arguments. Instead of making companies responsible, politicians should find local solutions and ensure that they are implemented.
On the other hand, NGOs and climate activists demanded even stricter regulations to protect workers, especially in developing countries. Excessive differences between wage and production costs would offer advantages for European companies – to the disadvantage of workers and the environment. This encourages nations to provide opportunities for even cheaper production in order to attract companies, contributing to further deterioration of working and environmental conditions (“race-to-the-bottom”).
The different points of view triggered heated discussions and uncertainty among companies. Many were eagerly awaiting a CSDDD update and wondering: when will CSDDD be implemented? What will it actually request or will it even completely fail due to the discourse? All related CSDDD news were closely monitored and widely shared. Even though, during the March votes, the directive had been revised and is now less stringent than before, it became clear that companies – directly or indirectly – will be affected by increased supply chain compliance and shall soon prepare for the upcoming requirements.
Overview of CSDDD requirements
The directive contains several articles in which the specific CSDDD requirements for companies are listed. Two activities are crucial and put the objectives of the directive in a nutshell:
- The primary objective is to prevent violations of human rights and environmental standards along the “chain of activities” by taking appropriate measures and minimizing risks. ESG due diligence must be carried out on new and existing, direct as well as indirect suppliers.
- If CSDDD criteria cannot be met, companies must take action to improve the circumstances, for example in the form of trainings or audits.
Basically, the requirements affect the entire chain of activities, upstream as well as certain downstream business activities are included. While in upstream activities all suppliers must be taken into account, the criteria for downstream activities have been softened. Downstream activities in the areas of transportation, storage and distribution only need to be covered if these activities are conducted on behalf of the company. Indirect business partners are therefore not included in downstream activities.
Regarding all own suppliers (upstream), both direct and indirect business partners are affected: All actors in the upstream supply chain are obliged to comply with the criteria, even if there is no direct contractual relationship with the company subject to the CSDDD.
However, the texts lack precision and leave room for interpretation. Maybe further parliamentary sessions and the transposition into national law will bring some clarifications here.
Specific requirements for companies are:
- The identification and management of negative impacts on human rights and the environment will become a mandatory requirement for affected companies.
- Due diligence must be integrated into management processes and the corporate policy.
- A grievance mechanism accessible to all stakeholders must be established along the entire value chain.
- Effectiveness has to be evaluated on a risk-based approach every 12 months. If necessary, due diligence obligations have to be updated.
- The compulsory publication of annual reports ensures transparency of the progress (Correlation with the CSRD and the ESRS).
- With regard to climate protection, a Climate Transition Plan (CTP) must be implemented
Consequences of violations
- First, penalties will be applied if a company affected by the directive does not meet the requirements. The fine can reach up to 5% of the company's global net turnover.
- Second, a civil liability may come into effect. Affected persons or their representatives (including trade unions and NGOs) who have suffered damage caused by a company's non-compliance with the criteria can assert claims for damages in court. However, the possibility of civil liability was ultimately adapted and limited to national civil procedure rules.
- Consequences for indirect business partners are mitigated. Under civil law, companies are only liable for their own breaches of duty if they ignore their due diligence. However, companies can also be held liable for negligence. In such situations, allegations could be made that more detailed investigations would have enabled the identification of the risks. In practice, the possibilities for more detailed investigation are manifold and their implementation should be risk-based.
Who is in scope?
While in previous versions of the CSDDD text the CSDDD scope included companies with more than 500 employees and a turnover of above EUR 150 million, the thresholds have now been raised resulting in fewer companies being affected. Currently, the CSDDD affects companies with more than 1000 employees* and a worldwide net turnover of more than EUR 450 million.
Specific criteria for companies from high-risk sectors were deleted in the current version of the directive. As a result, around 0.05% of European companies are now subject to the CSDDD – according to the original CSDDD draft, the number would have been far higher.
Depending on the number of employees and the amount of turnover, a different timeline must be considered.
When a company has to abide by this regulation, can be read here.
CSDDD for small businesses
Small and medium-sized enterprises are actually not directly included in the CSDDD scope. However, they may be indirectly affected as part of the supply chain of larger companies. For small companies already providing various types of ESG information to larger B2B customers, a standardized regulation through the CSDDD can be beneficial. Currently, corporations define different requirements and smaller suppliers are under pressure to cover these, often inconsistent, demands.
At the same time, the upcoming documentation effort can be more demanding for SMEs. Therefore, particularly in the case of SMEs, an individual and risk-based approach is a prerequisite for defining the requirements of larger companies for smaller suppliers.
Financial institutions
The financial sector was already excluded in the previous CSDDD in January 2024. Similarly, in the current version, financial service providers are not obliged to comply with the due diligence criteria. On the other hand (according to a paragraph in the recitals), financial service providers are nevertheless expected to take negative effects into account and use their influence to positively influence other companies. The CSDDD draft still lacks precise provisions in this regard.
Non-EU companies
Companies from non-EU countries are subject to the CSDDD if they generate net sales of more than 450 million euros in the EU, three years after the CSDDD comes into force.
CSDDD: When in force?
After the European Parliament voted one last time in April, the Council has to give its final approval before it is published in the Official Journal. After publication, it will then enter into force within 20 days and member states must transpose the directive into national law within two years.
In Germany, the Supply Chain Due Diligence Act (LkSG) will most likely be adjusted by 2026 at the latest, as the scope of protected legal interests and compliance with due diligence obligations in the CSDDD will be broader than is currently the case in German law.
The timing, when the CSDDD will come into effect, depends on the size of the company.
CSDDD timeline
| Employees | Turnover | First application obligation | First reporting obligation |
|---|---|---|---|
| > 5000 | > 1500 million | 2027 | For the financial year starting from 1.1.2028 |
| > 3000 | > 900 miliion | 2028 | For the financial year starting from 1.1.2029 |
| > 1000 | > 450 million | 2029 | For the financial year starting from 1.1.2030 |
The first group of companies will have to comply with the CSDDD from the year 2027 onwards. There is still some time left – but preparation efforts should not be underestimated as at the same time several affected companies have to prepare for other ESG regulations too. The sooner companies become familiar with the CSDDD requirements, the easier it will be to implement them and the more valuable the results will be.
Achieving transparency in the supply chain is a step-by-step process. As the CSDDD requires comprehensive knowledge of suppliers, and in particular those that pose an ESG risk, it is important to start engaging with crucial suppliers and extend this engagement to the wider pool of suppliers. This requires sufficient time – but brings considerable advantages for companies. Disruptions of all kinds in the supply chain can be identified and mitigated in advance. In addition, an analysis of suppliers not only offers insights into potential risks, but also opportunities to strengthen business relationships and secure resources in the long term.
Implementation and the advantage of synergies
In order to fulfil all due diligence obligations and to put the directive into practice, the internationally recognized OECD Guidelines for Multinational Enterprises should be applied. The OECD Guidelines for Responsible Business Conduct include 6 steps:
- Embed responsible business conduct into policies and management systems
- Identify and assess adverse impacts in operations, supply chains and business relationships
- Cease, prevent or mitigate adverse impacts
- Track implementation and results
- Communicate how impacts are addressed
- Provide for or cooperate in remediation when appropriate
Most companies worry about the increasing amount of analysis and documentation effort. However, careful preparation allows companies to identify significant overlaps with other regulations and sustainability strategies. In many cases, companies that already practice ESG management can use synergies and build on previous work. At the same time, companies can create a basis that not only serves to comply with this and other EU directives, but also contributes to holistic approaches for more overall sustainability in the company which assists a meaningful transformation.
CSRD, CSDDD and other EU directives
Together, the CSRD and CSDDD are key drivers for enhancing sustainability in businesses. The CSRD is encouraging many companies to engage with sustainability measures for the first time or, at least, to professionalize existing activities. The CSDDD introduces further elements and shall constitute a complementary set of specific requirements. We therefore recommend that sustainability managers combine the tasks and objectives of the CSRD with those of the CSDDD. The documents and analyses that have to be elaborated on behalf of the CSDDD can facilitate the attainment of further sustainability goals.
On the other hand, existing ESG strategies or decarbonization plans can be used as a basis for CSDDD preparation as well. Companies that have already developed a climate transition plan, sustainable supply chain management or human rights risk assessment, enjoy a considerable head start. Climate targets such as SBTi, so-called science-based targets, and in particular the necessary calculation of Scope 3 emissions, provide a good basis as well.
Some companies affected by the CSDDD are also subject to the EU Deforestation Regulation and the EU Directive against Greenwashing or CBAM. Working through the requirements of all these directives together and identifying parallels saves a lot of time and resources. With our extensive service areas and broad know-how, we are happy to provide you with an overview and help you identify the correlations between all the requirements which are relevant for your company.
Our multidisciplinary team of ESG experts assists you with the preparation and implementation of any related requirements!
Sources:
https://eur-lex.europa.eu/legal-content/DE/TXT/?uri=CELEX%3A52022PC0071
https://www.trend.at/recht/eu-lieferketten-richtlinie-csddd-analyse
https://www.wko.at/noe/transport-verkehr/spedition-logistik/update-csddd
https://mneguidelines.oecd.org/OECD-Due-Diligence-Guidance-for-Responsible-Business-Conduct.pdf
