On April 24, 2024, the European Parliament adopted the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) , which makes it mandatory for in-scope companies to prevent, end or mitigate their adverse impact on human rights and the environment (including climate) across upstream and downstream partners (supply chain, production and distribution). The final vote will be held on May 23, 2024, and, if approved, EU member states will need to implement the new directive within two years at the national level.
The due diligence requirements not only apply to a company’s direct operations but to its subsidiaries and supply chain. Similar to the Corporate Sustainability Reporting Directive (CSRD), companies impacted by this Directive are both EU companies and non-EU companies and the Directive will take a phased-in approach to disclosure.
For companies that fall within the scope of the Directive, non-compliance could result in fines and liability for damage. It is important to note that this is not the only EU due diligence obligation. In addition to CSDDD, EU companies must comply (if relevant to them), with the EU’s Conflict Minerals Regulation, Batteries Regulation, Deforestation Regulations and the newly approved EU ban on products made with forced labour.
This regulation will not only have implications for entities in-scope of the Directive, but companies within the supply chain of in-scope companies will also see increased requirements and information requests.
In-scope entities include non-EU companies, parent companies and companies with franchising or licensing agreements in the EU reaching the same turnover thresholds covered under this directive:
Companies:
| 2027 | 2028 | 2029 | |
| EU and non-EU companies and parent companies | 5,000 employees | 3,000 employees | 1,000 employees |
| €1,500m turnover | €900m turnover | €450m turnover |
Franchises:
| Companies with franchising or licensing agreements in the EU ensuring a common corporate identity | Worldwide turnover of at least €80m if at least €22.5m was generated by royalties |
Areas covered:
– Slavery
– Child labour
– Labour exploitation
– Biodiversity loss
– Pollution or destruction of natural heritage
– Climate
What is required:
– Adopt a transition plan relating to a business model that complies with the Paris Agreement global warming limit of 1.5°C
– Integrate due diligence into policies
– Make investments related to prevention, end and mitigation of risk
– Develop stakeholder engagement (e.g., impacted communities, civil society organizations)
– Seek contractual assurances from partners
– Improve business plan to support small- and medium-sized business partners and ensure they comply with new obligations
Monetary impact:
– “Naming and shaming” fines of up to 5% of a company’s net worldwide turnover
– Liability of damages caused by breaching due diligence obligations and full compensation of damages to victims.
For more information on what measures need to be taken to prepare for CSDDD, and implement programs that enable compliance, please reach out to TRC.
Megahan Peterson
Megahan Peterson is an Associate Director in TRC’s ESG Advisory Services group that provides services to both corporate and financial services clients. She has experience integrating options for corporate and financial managers for investment portfolios and operations strategies. Contact her at mepeterson@trccompanies.com.
Sean Learmonth
Sean Learmonth is an Associate Director in TRCs ESG Advisory Services group that provides services to both corporate and financial services clients. He has experience carrying out ESG and environmental due diligence for corporate and private equity clients globally. Contact Sean at slearmonth@trccompanies.com.