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Companies advised to ‘plan ahead’ as CSDDD moves step closer to becoming law

The watered-down version of the Corporate Sustainability Due Diligence Directive must now pass a final adoption vote by the European parliament (Photo: Frederick Florin/AFP via Getty Images)
The watered-down version of the Corporate Sustainability Due Diligence Directive must now pass a final adoption vote by the European parliament (Photo: Frederick Florin/AFP via Getty Images)

EU member states have finally approved a watered-down version of the Corporate Sustainability Due Diligence Directive

The much-maligned EU Corporate Sustainability Due Diligence Directive has moved a step closer to becoming reality as EU member states finally gave an updated text the thumbs up. However, the decision to raise the revenue threshold for companies that will fall in scope of the bill and to weaken other parts of the law was roundly criticised.

The main changes adopted, compared with the December 2023 political agreement, include:

  • An increase in the thresholds of the companies covered by the directive from 500 to 1,000 employees and from €150mn to €450mn turnover. Campaigners estimate that only a third of companies are now covered by the law compared with initial proposals.

  • The introduction of a three-stage phase-in, with the CSDDD applying to all in-scope companies five years after the transposition of the directive. The biggest companies with more than 5,000 employees and a turnover of €1,500mn or more will have three years to adopt the rules, while firms with more than 3,000 employees and a turnover of €900mn or more will be allowed four years to get their houses in order.

  • As agreed in December, companies will be required to draw up transition plans that align their strategy and business model with limiting global warming to 1.5C, but financial incentives for directors linked to the implementation of such plans have been removed.

  • As agreed in December, all financial institutions operating in the EU will have to comply with upstream supply chain obligations and the decision will be reviewed two years after the CSDDD comes into force to decide whether they should also be covered by downstream due diligence requirements. An accompanying statement to the law, which could have pushed the review forward to an earlier date but which had no political standing, has been deleted.

  • The removal of civil liability provisions that would have allowed, for example, trade unions to sue non-compliant companies.

  • The removal of the list of high-impact sectors, like clothing, agriculture and mining.

  • The removal of disposal and recycling responsibilities for businesses and the exclusion of indirect business relationships from the directive’s scope.

‘A key ESG project’

Campaigners voiced their disappointment with the changes, but most agreed the deal was nonetheless an important step in forcing businesses to better protect nature, human rights and the climate. Lawyers advised businesses to start now to prepare to meet the demands of the directive, while also calling for policymakers to give clarity around implementation.

“[The CSDDD is] a key ESG project that will move the needle for corporate responsibility in global supply chains and mandate companies to adopt climate transition plans, passed a crucial hurdle today,” says Julia Grothaus, litigation, arbitration and investigations partner at law firm Linklaters. “In view of the new, far-reaching obligations and risks under the CSDDD and their interplay with reporting obligations under the CSRD [Corporate Sustainability Reporting Directive], companies are well-advised to plan ahead.”

Hilary Ross, UK and Ireland regional managing partner at law firm DWF, says: “On the whole, clients welcome the fact that they will not have to navigate the EU on a country-by-country basis. However, given the size of fines for getting it wrong, there is a fervent hope that more attention, clarity and support will now be given to implementation.”

Judson Berkey, lead advocacy in UBS’ Chief Sustainability Office, makes a similar point: Regulations like the CSDDD are an essential piece of the puzzle for better supply chain standards. But simply adding to the regulatory burden is not enough—companies need clarity and consistency of application and enforcement to avoid the creation of unintended consequences.”

Richard Gardiner, head of EU public policy at non-profit World Benchmarking Alliance, says the vote “opens the door for one of the world’s largest single markets to bring in a legally mandated standard of how companies carry out supply chain due diligence. This is a significant break with the current approaches and will be the most extensive attempt to move from voluntary to hard law”.

He also insists on the CSDDD’s “significant global impact where any large multinational companies not headquartered in the EU but operating there will also be caught in scope”, leading potentially to a “positive spillover effect”.

“The law introduces a long lead-in period, but we expect to see companies already upskilling on their obligations as they can use the existing UNGPs [UN guiding principles on business and human rights] and OECD guidance as a reference point,” says Gardiner. “You are likely going to see the positive impacts in company behaviour come into effect even before the final application of the law.”

‘Ushers in a new era’

Isabella Ritter, EU policy officer at non-profit ShareAction, says that despite “last-minute changes made to appease some member states”, the vote “marks a watershed moment for corporate accountability, ushering in a new era where businesses will be required to take action against labour abuses and environmental pollution”.

Julian Oram, senior policy director at non-profit Mighty Earth, agrees: “Weeks of political wrangling has resulted in the directive being significantly watered down. Nevertheless, this is still a seismic piece of legislation, which will force large companies operating in the EU to prevent human rights abuses and environmental destruction linked to their business activities.”

The law must now pass a final adoption vote by the European parliament and it could still come unstuck if right-wing groups decide to block the law.

A service from the Financial Times