Scope
The CSDDD will apply to companies with more than 1,000 employees and a global turnover of more than EUR 450 million. The lower threshold for companies falling in certain high-risk sectors has been dropped. However, a review clause has been included so that it can be decided at a later date to include these companies in the scope of the CSDDD.
In addition, clarification has been provided on application of the CSDD in a group context. If the above thresholds are met at group level, the obligations in principle apply to the ultimate holding company. It may also have the due diligence obligations for the entire group carried out at the level of an (operating) subsidiary. The relevant holding company and the operating subsidiary are then jointly and severally liable.
It has been added that the CSDDD also applies to companies with a global turnover of more than EUR 80 million that generate more than EUR 22.5 million in royalties in the EU on the basis of a franchise or licence agreement with third parties. This only if there is a common identity, a common business concept and uniform business methods. Application of the CSDDD cannot therefore be circumvented by using franchise or licence agreements.
Phased introduction
The CSDDD is expected to be published by the end of May 2024. Twenty days after that, the CSDDD will enter into force. From then on, member states will have two years to implement the CSDDD into national legislation. From the moment the CSDDD is published, deadlines will start to run within which first the largest and then the smaller companies will have to comply with the implementation legislation. This phased implementation is as follows:
| Size companies |
Term |
Expectation |
| >5.000 employees and net sales of EUR 1.500 million |
3 years |
2027 |
| >3.000 employees and net sales of EUR 900 million |
4 years |
2028 |
| Other |
5 years |
2029 |
Chain of activities
The European Commission’s original proposal stated that due diligence should extend to the entire value chain. In the preliminary agreement, this has already been changed to the ‘chain of activities’. The final text clarifies that due diligence must extend to upstream activities (supply chain) as well as distribution, transport and storage from or by direct business partners. Importantly, this eliminates the need to investigate consumer behaviour or the aspects surrounding waste disposal.
For a long time, there was debate as to whether the financial sector should be exempted. It has therefore been clarified that financial institutions only have to apply the CSDDD with respect to their own activities and those of suppliers. Thus, they do not have to conduct investigations into customers’ activities. There is also a review clause for this, so this could still change.
Adverse impact on environment or human rights
When there is an adverse impact on human rights or environment has been concretised and tightened. The definitions now refer to the specific violations of rights, prohibitions or recognised objectives of international human rights agreements or environmental treaties listed in the Annex. Violation of the more general treaties on human rights and fundamental freedoms can only occur if companies can actually violate these rights, this directly affects a legal interest protected therein and the company could foresee the risk of this.
Climate transition plan
The European Commission’s original proposal already stated that companies would be required to prepare a climate transition plan in line with the Paris Agreement. This plan had to include concrete emission reduction targets if climate change should have been identified as a principal risk. The final text of the CSDDD states that in-scope companies must always set concrete emission reduction targets for scope 1, scope 2 and scope 3 emissions. Scope 3 represents the entire life cycle of all products a company buys, manufactures and/or sells, including emissions from customers. This obligation also applies to financial institutions.
The preliminary agreement stated that in-scope companies with more than 1,000 employees should promote the adoption and implementation of the climate transition plan through, among other things, financial incentives for management. This provision has been taken out.
Stakeholder engagement
Remarkably, the final text of the CSDDD includes a new provision detailing how companies should meaningfully engage their stakeholders. In short, stakeholders must be consulted before the:
- Gathering information on potential and actual negative impacts;
- Developing a preventive or corrective action plan;
- Taking the decision on terminating a business relationship;
- Taking appropriate measures, and;
- If applicable, the development of qualitative and quantitative indicators to monitor due diligence activities.
Liability
Finally, the liability provision has been clarified. Companies can be held liable for damage caused by their (a) conscious or negligent failure to comply with their obligation to prevent, mitigate and eliminate (potential) adverse effects and (b) persons have suffered damage as a result. It is emphasised here that companies are not liable for damage caused by business partners. If the damage is caused by several companies, they are jointly and severally liable for it.
Who bears the burden of proof is still left to the Member States. Nor has any provision been added on a reversal of the burden of proof. However, it does include that a company must produce evidence if a claimant makes its claim plausible, indicating that additional evidence lies with the company.
If you would like to know more or have any questions about ESG and your business, please feel free to contact Stephanie ter Brake.
