European Council reached agreement on the CSDDD

Introduction

On March 15, the European Union has marked a significant advancement in its dedication to sustainability and corporate responsibility. Following extensive negotiations, EU member states reached a consensus on the Corporate Sustainability Due Diligence Directive (CSDDD). This decision is set to enforce a framework requiring organisations to embed sustainable practices and due diligence processes within their daily operations and throughout their value chains.

What is the CSDDD?

The CSDDD represents a significant step forward in the EU's commitment to sustainable and responsible business practices. It includes obligations for organisations to assess and prevent actual and potential human rights adverse impacts en environmental impacts, with respect to their own operations, the operations of their subsidiaries and the operations carried out by their business partners in companies’ chains of activities.

“CSDDD mandates organisations to take appropriate steps to set up and carry out due diligence measures, with respect to their own operations, those of their subsidiaries as well as their direct and indirect business partners through their chain of activities.”

What is meant by chain of activities in the CSDDD?

Chain of activities means activities of a company’s upstream and downstream business partners.

Upstream is related to the production of goods or the provision of services by the company, including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products, or parts of the products and development of the product or the service.

Downstream refers to activities related to distribution, transport, and storage of the product, where the business partners carry out thosef activities for the company or on behalf of the company.

What due diligence process does the CSDDD require?

The CSDDD follows the six steps defined by the OECD Due Diligence Guidance for Responsible Business Conduct. These include due diligence measures for companies to identify and address adverse human rights and environmental impacts. This includes:

1. Integrating due diligence into policies and management systems.
2. Identifying and assessing adverse human rights and environmental impacts.
3. Preventing, ceasing or minimising actual and potential adverse human rights.
4. Monitoring and assessing the effectiveness of measures.
5. Communicating on the due diligence process internally and externally.
6. Providing remediation.

What was the journey of the updated CSDDD?

The journey of the revised CSDDD began on 14 December 2023, when the European Parliament and the European Council achieved a provisional consensus on the directive. Following intensive discussions among European institutions and EU member states, the European Parliament reached a (qualified) majority vote in favor of the CSDDD's final draft, which was published on 30 January 2024. This version was then forwarded to the European Council for approval on 28 February 2024. Initially, a (qualified) majority could not be secured within the Council, largely due to Germany's decision to abstain and France's eleventh-hour suggestion concerning the directive's company threshold criteria. In a last effort to address the concerns of member states and to enact new legislation before the end of the current parliamentary session, the Belgian government proposed a modified version of the CSDDD. On 15 March 2024, the European Council has endorsed this amended version of the directive.

What is the updated scope?

The updated scope of the CSDDD contains:

• EU-copmanies with more than 1000 employees on average and with a worldwide turnover of more than 450 million in the last financial year.
• Companies originating outside the EU generating more than 450 net turnover in the European Union in the financial year preceding the last financial year.

What are the updated timelines?

The adjusted CSDDD also includes an adaption scheme for in-scope companies which applies from the moment the CSDDD entries into force, which is as follows:

• Companies with more than 5000 employees and 1500 million turnover will have 3 years to comply with the CSDDD;
• Companies with more than 3000 employees and 900 million turnover will have 4 years to comply with the CSDDD;
• Companies with more than 1000 employees and 300 million turnover will have 5 years to comply with the CSDDD.

The revised CSDDD is set to impact around 5,400 significant EU businesses, narrowing the originally intended reach by 70% to just about 0.05% of all enterprises within the Union. Nonetheless, its influence extends beyond this, indirectly affecting a broader spectrum of organisations across the region and through global supply chains. This is due to the large entities covered by the directive passing on their requirements to their partners and suppliers.

What is the updated liability under the CSDDD?

The CSDDD introduces a dual approach to enforcement. First, it establishes a system of administrative oversight and penalties, which encompasses public identification of non-compliant companies and substantial fines (with the maximum fine reaching at least 5% of the global net turnover, as stipulated in Article 20 of the CSDDD). Second, the directive facilitates robust mechanisms for civil enforcement. Specifically, companies falling within the directive's purview will bear responsibility for any harm resulting from their failure to adhere to the obligations set out in the CSDDD (as outlined in Article 22 of the directive).

What is the next step?

CSDDD will now be put to a vote in the EU Parliament, which is expected to occur around mid-April. At 3rdRisk, we closely follow developments to ensure that we continue to provide optimal solutions for CSDDD compliance.