Preparing for the Corporate Sustainability Due Diligence Directive

When adopted, the Corporate Sustainability Due Diligence Directive (CSDDD) will oblige in-scope companies to identify, prevent, end, mitigate and account for potential and actual adverse human rights and environmental impacts arising from their business activities, as well as those of their subsidiaries and value chains.

With its adoption scheduled for early 2024 and another two years allowed for implementation, the CSDDD still requires early attention from its addressees. It is expected to affect companies' internal processes, shine a spotlight on how directors implement these processes and, last but not least, increase the incidence of liability related to sustainability and possibly class actions.

Having identified a fragmentation of sustainability – obligations for companies depending on their size, sector and jurisdiction – the CSDDD aims to even the playing field for these companies within the internal market.

While key European institutions may be debating the scope of the CSDDD, it appears to have been settled as follows:

• Group one: EU companies with more than 500 employees and a net worldwide turnover of more than EUR 150m in the last financial year.
• Group two: EU companies with more than 250 employees and a net worldwide turnover of more than EUR 40m, provided at least 50 % of this turnover was generated in a high-impact sector. The Commission defines "high-impact" as manufacturing textiles, engaging in various agricultural activities, and the extraction of mineral resources.
• Group three: Non-EU companies that generated a net turnover of more than EUR 150m in the EU in the last financial year.
• Group four: Non-EU companies that generate a net turnover of more than EUR 40m in the EU, provided at least 50 % of their worldwide turnover was generated in a high-impact sector.

Small and medium-size companies would not be directly in scope, but they could be affected in their capacity as contractors or subcontractors to any of the above companies.

Companies targeted by the CSDDD will need to integrate due diligence into their corporate policies with a view to eliminating the negative impact on human rights and the environment. While this will be an obligation of means rather than of results, it will nevertheless result in the implementation of preventive action plans, the obtaining of contractual assurances from direct business partners, and the subsequent verification of compliance. Companies covered by the CSDDD would need to ensure due diligence not just regarding their own operations, but those of all entities in their value chains with which they have direct and indirect business relationships.

The CSDDD aims to enhance senior-level responsibility for observing the sustainability principles laid down in it. Hence, in addition to their regular fiduciary duties, directors of in-scope companies will have a duty of care under the CSDDD, making them responsible for putting in place and overseeing due diligence actions, and reporting to the board of directors in that respect.

Once implemented, Member States will be required to appoint supervisory authorities with investigative and enforcement powers in the field.

The CSDDD is also expected to serve as an alternative civil liability instrument to hold in-scope companies accountable for adverse impacts on human rights or the environment, if these could have been avoided by proper prevention and mitigation actions. Once the CSDDD is enacted, it may be realistically assumed that there will be more class action litigations against companies concerning liability for human rights violations in the supply chain.

The CSDDD will certainly impact M&A processes going forward, as buyers will focus more on their targets' ESG compliance. In addition to verifying targets' readiness to identify and mitigate potential adverse impacts on human rights and the environment, M&A due diligence will aim to identify civil liability risks and related financial exposure, as well as the final burden of potential restructuring actions and remediation costs.

author: Mădălina Neagu