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EU Corporate Sustainability Due Diligence Directive: approval by the European Parliament 

Following the failure of the European Council to reach an agreement on the final draft of the EU’s proposed Corporate Sustainability Due Diligence Directive (also known as the “CSDDD” or the “CS3D”) on the 28th February 2024, on the 24th April 2024, the European Parliament approved a revised text of the Directive.

As mentioned in our earlier article on the Directive, the aim is for the CS3D, if adopted, to sit alongside other EU directives, such as the Non-Financial Reporting Directive (Directive 2014/95/EU), the Corporate Sustainability Reporting Directive (Directive (EU) 2022/2464) and the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088) as part of the EU’s European Green Deal.

In brief, the CS3D is a minimum harmonisation directive and imposes an obligation on large companies falling within its remit to carry out a risk-based due diligence exercise to mitigate against and avoid adverse environmental and human rights impacts. The Directive also ensures accountability on such companies in the event of actual adverse impacts being caused. 

In particular, the obligations imposed on in-scope companies require them to:

  • Integrate due diligence into their policies and risk management systems, with respect to their own operations, those of their subsidiaries as well as their direct and indirect business partners through their chain of activities, on both an upstream and downstream basis; 
  • Identify, assess and, where necessary, prioritise potential and adverse impacts;
  • Prevent and mitigate against potential adverse impacts;
  • Bring to an end any actual adverse impacts or, minimise their extent; 
  • Remedy any actual adverse impacts; 
  • Implement meaningful engagement with stakeholders; 
  • Establish and maintain a notification mechanism and complaints procedure; 
  • Monitor the effectiveness of their due diligence policy and measures; and 
  • Communicate publicly on due diligence.

In addition, affected companies are required to implement, on a best efforts basis, a transition plan for the mitigation of climate change, aligning the companies’ strategies with climate neutrality targets and the Paris objectives as set out in the Paris Agreement. 

The scope of companies falling within the remit of the CS3D has been watered down since the previously published text. In terms of the Directive now approved by the European Parliament, a company would fall within the scope of the CS3D if it is:

  1. An EU company with 1000 or more employees and a net worldwide turnover of at least €450,000,000 in the last financial year, or the ultimate parent company of a group of companies which reached these thresholds in the last financial year;
  2. A non-EU company with a net EU turnover of at least €450,000,000 in the financial year preceding the last financial year, or the ultimate parent company of a group of companies which, on a consolidated basis, reached this threshold in the financial year preceding the last financial year; 
  3. A company which entered into, or which is the parent company of a group which entered into, certain franchising or licensing agreements in the EU in return for royalties amounting to more than €22,500,000 in the last financial year (or, in the case of a non-EU entity, the financial year preceding the last financial year) and provided that the company had or is the ultimate parent company of a group which had a net worldwide (or EU, in the case of a non-EU entity) turnover of more than €80,000,0000  in the last financial year (or, in the case of a non-EU entity, in the financial year preceding the last financial year).

The above conditions must be satisfied for two consecutive financial years in order for the provisions of the CS3D to apply to that particular company. Once the conditions cease to be met for each of the last two relevant financial years, the provisions of the Directive will likewise cease to apply to that company.

The draft Directive previously contemplated a carve-out from the above conditions for companies operating in certain high-risk sectors. This has now been removed from the final text of the Directive as approved, however the Commission is now obliged to assess, within the first six years from the entry into force of the Directive, whether a sector-specific approach for high-risk sectors is to be adopted in connection with the thresholds setting out the scope of the Directive.

In addition, the current text of the Directive caters for a possible exemption from the obligations thereunder for an ultimate parent company whose main activities are the holding of shares in its operational subsidiaries and where that company does not take management, operational or financial decisions which affect the corporate group.

Civil liability may arise in the case of breaches of the CS3D, and Member States are required to implement national rules on penalties, including pecuniary penalties, in the case of infringements of the CS3D. Pecuniary penalties are to be based on the company’s net worldwide turnover, up to a maximum of not less than 5% of the net worldwide turnover of the company in the financial year preceding the fining decision.

In the case of an ultimate parent company, the pecuniary penalties are to be calculated on the basis of the consolidated turnover reported by the ultimate parent company.

The intention is for the CS3D to be implemented on a rolling basis, starting off with larger companies. Assuming that the CS3D enters into force in 2024, implementation is expected to take place gradually over the course of 2027 until 2029.

Next steps

The text of the Directive will enter into force on the 20th day following its publication in the EU’s Official Journal, which is expected to take place at the end of May 2024. Following its entry into force, Member States will have a two year timeframe within which they are to transpose the provisions of the Directive into national law. 

Please feel free to reach out to discuss how your business may be impacted by the CS3D, either as a company falling within the scope of the Directive or else by virtue of it being a direct or indirect business partner in the chain of activities of an in scope company.   

Should you wish to discuss further, contact Nicola Jaccarini on nicola.jaccarini@camilleripreziosi.com

Nicola Jaccarini

Following the failure of the European Council to reach an agreement on the final draft of the EU’s proposed Corporate Sustainability ...

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