The Corporate Sustainability Due Diligence Directive (Directive 2024/1760)
The Corporate Sustainability Due Diligence Directive (CSDDD), formally Directive (EU) 2024/1760, is the European Union’s landmark legislation requiring large companies to identify, prevent, mitigate, and account for adverse human rights and environmental impacts in their own operations, their subsidiaries, and their chains of activities. Adopted on 24 May 2024 after protracted political negotiations, the CSDDD introduces a mandatory human rights and environmental due diligence duty that represents a paradigm shift from voluntary corporate social responsibility to legally binding obligations. The Directive must be transposed into national law by Member States by 26 July 2026.
Scope and Application
The CSDDD applies to two categories of companies. The first category covers EU companies with more than 1,000 employees and a net worldwide turnover exceeding €450 million in the last financial year. The second category covers non-EU companies generating a net turnover of more than €450 million in the EU in the financial year preceding the last financial year. The thresholds were increased during the legislative process from the Commission’s original proposal of 500 employees and €150 million turnover, reflecting resistance from Member States concerned about regulatory burden.
The Directive also applies to companies that entered into or operate under franchise or licence agreements in exchange for royalties exceeding €22.5 million, provided the company generated a net turnover exceeding €80 million. Small and medium-sized enterprises are not directly subject to the due diligence obligations, but they may be indirectly affected as business partners in the value chains of in-scope companies.
Due Diligence Obligations
The CSDDD requires companies to conduct risk-based due diligence encompassing six steps. First, companies must integrate due diligence into their corporate policies and risk management systems. Second, they must identify actual or potential adverse impacts on human rights and the environment arising from their own operations, subsidiaries, and business partners in the chain of activities. Third, they must take appropriate measures to prevent or mitigate potential adverse impacts and to bring actual adverse impacts to an end or minimise their extent. Fourth, companies must establish and maintain a notification mechanism and complaints procedure (Article 12) allowing persons and organisations to raise legitimate concerns about adverse impacts. Fifth, they must monitor the effectiveness of their due diligence policies and measures through periodic assessments. Sixth, they must publicly communicate on due diligence matters by publishing an annual statement on their website.
The due diligence obligations cover a broad range of human rights, including those enumerated in the International Bill of Human Rights, the International Labour Organization’s fundamental conventions, and specific international labour standards covering forced labour, child labour, occupational safety, freedom of association, and adequate wages. Environmental impacts cover those listed in international environmental conventions, including climate change, biodiversity loss, ecosystem degradation, pollution, and deforestation.
Climate Transition Plans
A notable innovation of the CSDDD is the requirement for companies to adopt and implement a climate transition plan (Article 15) aligned with the Paris Agreement objective of limiting global warming to 1.5°C. The plan must identify emissions reduction targets and actions, describe the decarbonisation levers for achieving those targets, and explain how the company’s business model and strategy are compatible with the transition to a sustainable economy. The plan must be updated every 12 months and include intermediate targets for 2030 and in five-year increments up to 2050. Companies must take into account the fulfilment of these obligations in their variable remuneration policies.
Civil Liability
The CSDDD establishes a civil liability regime (Article 22) for damages arising from failure to comply with due diligence obligations. Companies are liable for damages caused to natural or legal persons where they intentionally or negligently failed to carry out due diligence and as a result an adverse impact occurred that should have been identified, prevented, mitigated, or brought to an end. The liability regime does not pre-empt Member State laws on liability in the chain of activities, meaning that national rules on joint and several liability or contributory negligence may apply. Member States must ensure that limitation periods of at least five years apply to actions for damages and that legal persons have standing to bring representative actions on behalf of affected persons.
Enforcement and Administrative Penalties
Member States must designate one or more competent authorities (Article 18) responsible for supervising compliance with the Directive. These authorities have investigatory powers, including the power to request information, carry out inspections, and conduct hearings. They may impose pecuniary penalties based on the company’s net worldwide turnover, with a maximum of not less than 5 per cent of net worldwide turnover (Article 20). Authorities may also issue injunctive measures requiring cessation of infringements and remediation of adverse impacts. A European Network of Supervisory Authorities (Article 21) is established to coordinate enforcement, exchange best practices, and issue guidance.