Today the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) enters into force after a protracted and hesitant legislative process. It ushers in a transformative era for corporate accountability and sustainability practices.
In-scope companies and their obligations
The CSDDD applies to large EU companies (i.e. incorporated under the law of a Member State) with over 1,000 employees and a net worldwide turnover exceeding EUR 450 million. It also covers large non-EU companies with a net turnover exceeding EUR 450 million in the EU. In addition, the CSDDD covers the ultimate parent company of a group reaching the aforementioned thresholds, as well as certain companies with a franchising or licensing business model.
The Directive relies on two key elements: effective due diligence policies and transition plans.
Firstly, in-scope companies have a corporate due diligence duty: they are required to adopt a risk-based approach to identify, prevent, mitigate, bring to an end, and remediate potential and actual adverse impacts in the operations of the company, its subsidiaries, and, where related to its value chain(s), even its business partners. Collecting ESG data – also beyond the company’s own operations – thus continues to become more important. Furthermore, the Directive imposes a meaningful engagement with stakeholders, a notification mechanism and complaints procedure, as well as monitoring and reporting duties. These due diligence obligations go beyond current obligations for companies, but should not result in a requirement to guarantee, in all circumstances, that adverse impacts will never occur or that they will be stopped. Therefore, the main obligations in the CSDDD are obligations of means.
Secondly, in-scope companies must develop and implement a transition plan for climate change mitigation which aims to ensure, through best efforts, that the company’s business model and strategy are compatible with the transition to a sustainable economy, aligned with the Paris Agreement and the climate neutrality objective in the European Climate Law. Companies that report a transition plan in accordance with the Corporate Sustainability Reporting Directive (CSRD) sustainability reporting standards will be deemed to have complied with this obligation.
The European Commission will issue sets of guidelines to support companies on how to fulfill their obligations. These guidelines will only be made available by 26 January and 26 July 2027.
What’s next?
Member States now have two years to transpose the CSDDD into national law, i.e. by 26 July 2026. As from 26 July 2027, the new rules will apply to companies gradually, following a phase-in until 26 July 2029. The Directive provides for minimum harmonization, ensuring a minimum level of protection whilst allowing Member States to impose stricter obligations or to opt for a broader scope.
Companies run a potentially high cost in case of non-compliance. The CSDDD combines public and private enforcement, ranging from penalties to civil liability and full compensation. Pecuniary penalties can amount to 5% of a company's net worldwide turnover and Member States could set even higher maximum amounts. As for private enforcement, the required engagement with stakeholders and reporting duties may play an important role. One may expect civil society organizations to keep a close eye on compliance. Previous proposals of the CSDDD also included a duty of care for directors, as well as their responsibility for putting in place and overseeing the due diligence actions and policy. This has been removed in the final version of the CSDDD, leaving it to the Member States to determine the directors’ duties and liability.
The Commission will regularly report on the Directive and the need to review, particularly regarding the necessity of laying down additional sustainability due diligence requirements tailored to regulated financial undertakings. It remains to be seen to what extent a spill-over effect will occur, e.g. through open norms such as the general standard of care or good faith.
In any case, the CSDDD represents a monumental step towards a more sustainable and responsible business environment. By imposing due diligence requirements and promoting corporate accountability, the CSDDD aims to positively impact human rights and the environment, both regionally and globally. The journey towards full compliance begins now, relying on collaborative efforts between companies, Member States, and the European Commission.
