EU Adopts Corporate Sustainability Due Diligence Directive

On 5 July 2024, the Corporate Sustainability Due Diligence Directive (CSDDD) was published in the Official Journal of the EU, marking a significant milestone in the growing regulatory environment in relation to companies being required to embed responsible business conduct into due diligence processes and policies.

Initially proposed in February 2022, the CSDDD aims to create a comprehensive due diligence framework across the EU. The CSDDD has wide-reaching scope, impacting both EU and non-EU companies with significant operations in the EU market.

In recent years, several EU Member States have introduced due diligence legislation, such as the German Supply Chain Act and the Norwegian Transparency Act. The CSDDD also complements an array of other human rights and value chain due diligence-related legislation in the EU, including the Deforestation Regulation, the Conflict Minerals Regulation, and the forthcoming Forced Labour Regulation.

In contrast to these regulations which apply to specific contexts or sectors, the CSDDD aims to establish a common and comprehensive due diligence framework across in-scope companies.

Companies Subject to the CSDDD

The CSDDD applies to a wide range of companies, both within and outside the EU, that have significant operations in the EU market.

The thresholds for companies to fall within the scope of the CSDDD are:

The directive will be phased in based on company size and turnover, with the first companies being subject to its requirements three years after the CSDDD enters into force (i.e., in 2027).

Key Aspects of the CSDDD

The CSDDD requires companies to identify, prevent, and mitigate adverse human rights and environmental impacts linked to their operations, including upstream and certain downstream activities. Companies must integrate due diligence into their policies, identify and assess potential adverse impacts, implement measures to prevent or mitigate these impacts, and establish complaint mechanisms. They are also required to monitor the effectiveness of their due diligence measures and publicly communicate their efforts.

Member States must establish effective penalties for non-compliance, including fines of up to 5% of a company’s net worldwide turnover. The CSDDD also introduces a civil liability scheme for companies failing to meet due diligence obligations.

Next Steps

The CSDDD will affect both in-scope companies and their supply chains, as companies will likely pressure their suppliers to comply with the directive’s requirements.

Member States have two years from the CSDDD’s entry into force on 25 July 2024 to transpose the CSDDD into national law.

Latham & Watkins is preparing a detailed assessment of the final text, including analysis of key features of the CSDDD and high-level guidance on how potentially impacted companies can prepare. A full article will be available shortly on the ESG Resource Hub.