What You Need to Know About the Changes to the CSDDD

On 15 March 2024, the European Council approved a revised version of the much-deliberated EU Corporate Sustainability Due Diligence Directive (CSDDD). This comes after the initial proposal failed to reach a majority, largely due to Germany abstaining from voting in the European Parliament.

Due to intense debate and reservations over the originally proposed directive, the thresholds for in-scope companies were amended in an attempt to redeem what had looked like a near demise of the proposal. This essentially means that fewer companies will now be subject to CSDDD, and those that are in scope will have time to roll out implementation gradually. 

This article explores the significant changes to the CSDDD, noting that changes are still imminent until final adoption. 

Threshold of coverage

One contested area surrounding the original proposal was the coverage of the directive, with certain Member States pushing for higher thresholds. The latest changes were put forth by Belgium to straddle the divide between economic interests and the sustainability objectives of the CSDDD. These changes largely concern thresholds for determining in-scope companies.

Any business that satisfies one or more of the following thresholds is in scope:

• EU companies with more than 1,000 workers and global revenue surpassing €450 million
• Non-EU companies operating in the EU market with revenue exceeding €450 million 
  

For clarity on the second criterion above, the European Commission will further release a list of non-EU companies covered by the Directive.

The CSDDD takes a phased-in approach for in-scope companies depending on their size:

• Companies with more than 5,000 workers and a yearly revenue of at least €1,500 million have three years from the time of adoption to phase in compliance
• Companies with over 3,000 workers and over €900 million in revenue have four years from the time of adoption to phase in compliance
• Companies with over 1,000 workers and over €450 million in revenue have five years from the time of adoption to phase in compliance
  

Previously, sectors identified as high-risk with more than €40 million in revenue, and at least half of which is generated in a high-risk sector, were automatically in scope. The latest proposal has removed this clause but allows for future changes regarding the obligations of high-risk sectors.

Climate mitigation transition plans

Under Article 15 of the CSDDD, in-scope companies will be required to establish a transition plan pursuant to Article 19a of the Corporate Sustainability Reporting Directive (CSRD). The objective of the transition plan should be in line with the Paris Agreement’s target scenario to limit global warming to no more than 1.5C. The transition plan should address climate change mitigation for the company, with the purpose of ensuring that the business model, strategy, and operations of the in-scope company are aligned with the transition towards a sustainable economy. Despite this, companies are no longer expected to implement a policy to support the implementation of the transition plan, which was previously a requirement.

Relevance to the financial sector

The CSDDD still maintains a focus on the financial sector given its extensive impact and supply chain. However, due diligence is only required for its own operations and the upstream supply chain, and high-risk sectors could be subject to further review.

Termination of supply chain partners

If a violation is found within the supply chain, termination of a partnership shall only be a last resort following a preventive and corrective plan and only if termination does not result in greater adverse effects. A risk management system to identify and assess actual and potential risks is required, and the company is responsible for the risks caused directly by them. If risks are not directly caused by the company, a general duty of care applies. Stakeholder engagement is required pursuant to Article 8d of the proposed CSDDD.

What’s next?

The directive is pending approval by the European Parliament and endorsement by the European Commission. Voting is set to take place in April 2024 in the European Parliament. Companies that meet the thresholds in this article are advised to prepare early by referring to our previous article on the human rights due diligence within the CSDDD.