What is the CSDDD?

The Basics

We’re about to enter a new era of environmental and human rights due diligence.

30th May 2024

It’s the law that almost didn’t happen.

Its fate hung delicately in the balance; French and German officials almost threw the baby out with the bathwater. But finally, after four years of negotiations and amendments, the Corporate Sustainability Due Diligence Directive (CSDDD, pronounced “C S-Triple-D”) passed in Brussels—home of the European Parliament—on 24 April 2024.

“Due Diligence passed in Council! People and planet prevailed over cynicism,” exclaimed Lara Wolters on X (formerly Twitter), the Vice-Chair of the Legal Affairs Committee for the European Parliament.

It beckons a new era of corporate due diligence for the EU and more. But what does it actually mean for the business world?

What is the CSDDD?

When CSDDD comes into force, certain companies will be obliged by law to:

Develop a due diligence policy on their human rights and environmental harms
Identify potential and actual adverse human rights and environmental violations arising in their own operations and across their supply chains
Take measures to prevent or mitigate potential impacts
End or minimise identified actual impacts
Continuously evaluate the efficiency of due diligence measures
Publicly report about the due diligence policy, process and findings

“CSDDD goes a step further than reporting on what the company is doing. It requires companies to actually do due diligence.”
Hannah Edmonds-Camara

Also, affected companies must implement a Climate Transition Plan to ensure that their business model and strategy are working to limit global warming to 1.5 °C, in line with the Paris Agreement.

In essence, this means companies will no longer be able to turn a blind eye to environmental or human rights violations in their own or their supply chains.

The directive enshrines into hard law some of the voluntary standards on human rights and environmental due diligence (such as the UN Guiding Principles on Business and Human Rights). It also works hand-in-hand with the EU’s Corporate Sustainability Reporting Directive (CSRD), which focuses more on sustainability reporting.

“CSDDD goes a step further than reporting on what the company is doing,” notes Hannah Edmonds-Camara, special counsel at multinational law firm Covington. “[It] requires companies to actually do due diligence.”

Who has to follow it?

The law will affect:

EU companies (on a standalone or consolidated basis) with more than 1,000 employees on average and a net worldwide turnover of more than EUR 450 million; and
non-EU companies (on a standalone or consolidated basis) that generate a net turnover of more than EUR 450 million within the EU.

It’s important to note that the law applies to a company’s entire supply chain, including its upstream and downstream business partners or “chain of activities” – so it may affect your clients or suppliers if not your own business.

The new rules will gradually apply to companies. In 2027, the law will first affect companies with over 5,000 employees and a worldwide turnover higher than 1500 million euros.

What happens to companies that don’t follow the CSDDD?

If companies don’t follow the directive, they could face consequences such as a compliance order and even financial penalties, including fines of up to 5% of the company’s net turnover. This is so victims of any environmental or human rights violations can claim compensation.

Does the CSDDD go far enough?

It was no easy feat to get all EU officials to agree. Indeed, the law was diluted over the course of many years before reaching an agreement. The most damning was increasing employee and turnover thresholds that companies had to meet, which is now significantly higher than the figures proposed in previous drafts. In turn, this has reduced the number of companies that will be affected by two-thirds.

However, we will hopefully see that many companies outside of the law’s scope will still follow suit – due to what is called ‘the Brussels effect”. This is the trend of laws going global after being passed in the EU. “Corporate managers need a consistent approach to multiple jurisdiction reporting – and they’ll often choose meeting the highest standard. If that’s the European standard, that’s the de facto standard,” says Peter Walsh, Business Development Director, Europe at Benchmark Gensuite.

“Corporate managers need a consistent approach to multiple jurisdiction reporting – and they’ll often choose meeting the highest standard. If that’s the European standard, that’s the de facto standard.”
Peter Walsh

“A new chapter is about to begin for corporate accountability,” says Beate Beller, a campaigner at the NGO Global Witness. “The biggest companies operating in the EU will be obliged to respect human rights and the environment, and the law gives people who are at risk from dangerous business practices a chance to fight back.”