After a two-and-a-half-year legislative process, the EU’s Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) was published in the EU Official Journal on 5th July 2024, marking a paradigm shift in corporate sustainability. In recent years, companies have increasingly faced societal and legal pressures to adopt more sustainable business practices, typically centered around environmental protection. However, the scope of sustainability addressed by this Directive is broader and more comprehensive. The CSDDD not only reinforces environmental stewardship but also places a significant emphasis on the protection of human rights in the various levels of a company’s chain of activities. The right to life and human dignity and the right to just and favourable work conditions are placed at the forefront. This new framework impacts not only companies but also developing countries and society as a whole, fostering a more transparent and ethical corporate landscape.

The duty of corporate due diligence extends beyond companies’ own operations to also include the operations of their subsidiaries and, where applicable, their business partners. In this way, companies must not only be concerned with the integration of due diligence in their own business activities but must also keep an eye out for the activities of their upstream and downstream partners. Moreover, companies subject to this Directive will also be required to draw up and implement a transition plan for climate change mitigation in accordance with the 2050 climate neutrality goal laid down in the Paris Agreement. This requirement also features in the EU Corporate Sustainability Reporting Directive.

Both EU and non-EU companies (or their ultimate parent) with a minimum net turnover of €450 million fall within the scope of these new rules. In the case of EU companies, there is the additional requirement of the company engaging more than 1,000 employees. The CSDDD is only applicable to non-EU companies if the €450 million net turnover is generated within the EU. Even though at face value, the CSDDD seemingly excludes small and medium-sized enterprises (SMEs) from its direct purview, these companies will undoubtedly be impacted because of their involvement in the value chains of larger companies.

Enforcement of these corporate due diligence rules is guaranteed through two main mechanisms: administrative control and civil liability. On a national level, Member States must appoint an authority responsible for monitoring and enforcement, which includes the imposition of fines and “naming and shaming” methods. On an EU level, the Commission is set to establish a European Network of Supervisory Authorities to unite representatives from national authorities, ensuring a coordinated approach. In addition, Member States must guarantee that companies are held liable for damages resulting from the intentional or negligent non-compliance with the CSDDD obligations.

The CSDDD entered into force on 25th July 2024, with Member States having two years to transpose this Directive into national law. In line with the principle of minimum harmonization, Member States are prohibited from reducing the level of protection afforded by this framework upon transposition. Moreover, the CSDDD cannot be used as justification for lowering the protection already provided by national laws. Companies subject to these new rules must adhere to them within a phased timeline contingent on company size.

In preparation for the CSDDD, companies are encouraged to take several key steps. First, they need to determine if they are subject to the Directive and establish the applicable timeline for compliance. Next, companies should compile data on their business activities, value chains, and business partners. In relation to this step, early collaboration with partners to establish contractual clauses on CSDDD responsibilities is crucial. Companies can also start conducting a gap analysis and checking if they have the necessary policies, systems and practices in place which will help in recognising areas demanding further action to fulfil CSDDD standards. Finally, companies should evaluate the necessity of allocating additional human, financial, and technical resources to effectively implement the due diligence strategy and process.