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The Corporate Sustainability Due Diligence Directive (CSDDD), a crucial piece of legislation requiring businesses to address their negative impacts on human rights and the environment, was adopted by the European Parliament by a vote of 374 to 235. This vote removed a major obstacle to the new law’s implementation, which had been seriously doubted after an earlier version was rejected by member states in the EU Council.
The new CSDDD now needs official Council approval before it can go into effect, drastically reducing the number of enterprises covered by the legislation and lengthening the time frame for full implementation.
The European Commission conducted studies in 2020 on the responsibilities of directors, sustainable corporate governance, and due diligence requirements in the supply chain. These studies resulted in the Commission’s proposed CSDDD draft, which was presented to Parliament in February 2022. The CSDDD draft outlines the obligations of companies to identify, assess, prevent, mitigate, address, and remedy impacts on people and the planet, ranging from child labor and slavery to pollution and emissions, deforestation, and ecosystem damage, in their upstream supply chain and some downstream activities like distribution and recycling.
The rule also compels member states to set up supervisory agencies to look into and penalize non-complying organizations. Companies must also prepare transition plans to match their operations with the Paris Agreement aim of reducing global warming to 1.5°C.
The new legislation was agreed upon by Parliament and the Council, and the directive was sent to each body for final approval. However, the Council’s approval vote was postponed in January due to Germany’s threat to oppose the regulation due to concerns about the bureaucratic and potential legal impact on companies. Italy also reportedly withdrew its support, casting further doubt on the regulation’s success. Ultimately, the regulation failed to pass in late February after a last-ditch effort by France to significantly reduce its scope to only the largest companies in the EU.
Member states of the Council eventually accepted the CSDDD last month after some major legislative concessions. Revisions to the CSDDD resulted in a major reduction in the number of enterprises.
The criteria for those covered by the new law were raised from 500 to 1,000 workers and from €150 million to €450 million sales. Reducing the number of firms covered by the CSDDD by almost two thirds would be the result of the revised thresholds. With the option to be reevaluated in the future, lower standards that had been applied to high-risk industries were also eliminated.
Further modifications to the CSDDD included phasing in the law, starting in 2027 for businesses with more than 5,000 employees and revenue over €1.5 billion, then in 2028 for businesses with more than 3,000 employees and revenue over €900 million, and in 2029 for all other businesses covered by the law. The provision that businesses encourage the adoption of climate transition plans through financial incentives was also eliminated in the updated CSDDD.