CSDDD update: Breakthrough in European Corporate Sustainability Due Diligence Directive (CSDDD)?

On 15 March 2024 the Committee of the Permanent Representatives (COREPER), a subsidiary body of the Council of the European Union which prepares decisions, agreed to the Corporate Sustainability Due Diligence Directive (“CSDDD” or CS3D) in the form of a compromise text. This text deviates from the provisional political agreement achieved in the legislative trilogue in December 2023. For example, the scope of the Directive has been reduced by significantly increasing the required number of employees and the turnover thresholds.

A compromise had to be found because some EU countries including Germany spoke out against the text agreed on in the trilogue and the additional coordination rounds and therefore for a long time there was no majority in support of the CSDDD. Only huge efforts by the Belgian presidency of the Council led to the (provisional) breakthrough and to France and Italy’s assent, with Germany abstaining.

The compromise now achieved still has to be formally adopted by the Council of the European Union. It will then be discussed in the Committee on Legal Affairs of the European Parliament and is likely to be passed in the plenary assembly of the European Parliament in late April 2024.

A. Main areas of regulation at a glance

I. Scope of application

The CSDDD applies to companies established under the laws of an EU member state and to companies not domiciled in the EU. The thresholds for EU companies are related to the number of employees and annual net turnover. On average, the figures are over 1,000 employees and annual net turnover worldwide of over €450m. At non-EU companies the key figure is annual net turnover, which must exceed €450m.

The text of the Directive no longer specifies lower thresholds for certain high-risk sectors (such as textiles manufacturing or wholesale of textiles, apparel and footwear). Obligated companies are those with a legal form listed in Annex I and II of Directive 2013/34/EU. Under German law, these are AG, KGaA, GmbH, KG and OHG.

II. Chain of activities and due diligence obligations

The original draft of the CSDDD was linked to the value chain to which the companies’ due diligence obligations relate. In the meantime, the term ‘chain of activities’ seems have to become established. The recitals state explicitly that this is a term of its own which is not to be equated with ‘value chain’ or ‘supply chain’ (see recital 18).

According to Article 3(1)(g) CSDDD, the chain of activities includes all business partners on the supply side (upstream) connected to the products manufactured or services provided by the company. In addition, all business partners which transport, distribute or store the products for the company (downstream) are also included. There is no such provision for the company’s services. The disposal of products is not covered by the chain of activities either (see recital 18).

According to Article 3(1)(e) CSDDD, a business partner is a legal entity which is related to the business activities, products and services of the obligated company. This includes companies with whom the obligated company has a commercial agreement (direct business partners), but also legal entities with which there is no such contractual relationship (indirect business partners).

The due diligence obligations, which are basically similar to those of the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz), relate to this chain of activities. Put simply, companies must now determine whether human rights or environmental risks exist in this chain and, depending on the result, take appropriate preventive and remedial measures.

III. Climate protection measures

The current draft of the CSDDD also picks up on the 1.5°C target set in the Paris Agreement on Climate Change. Obligated companies have to develop and implement a ‘transition plan’ to make their best efforts to reach the climate protection target within their business model and corporate strategy. In addition, the plan must contain details of the goal of climate neutrality as specified in the European Climate Law. In particular, the transition plan must define objectives for the year 2030 and then at five-year intervals up to 2050.

IV. State sanctions and liability under civil law

The CSDDD regulates state sanctions, such as imposing fines. Unlike the German Supply Chain Due Diligence Act, however, the draft also contains regulations on the civil liability of companies.

Breaches of the national law transposing the CSDDD can be punished by fines and other penalties. These are calculated on the basis of up to 5% of net worldwide turnover.

A culpable breach of the due diligence obligations and any resulting damage can lead to civil liability on the part of the company. Liability is excluded if only business partners in the chain of activities have caused the damage. The limitation period for such claims will not be less than five years.

Particularly notable are the provisions on the submission of evidence. In certain circumstances, national courts could order companies to disclose evidence. The options go far beyond those currently available in the German Code of Civil Procedure regarding the production of documents.

B. Entry into force and transition periods

If the European Parliament approves the compromise, the CSDDD will come into force in several steps.

For example, companies with over 5,000 employees and turnover above €1.5bn will be subject to the obligations three years after the Directive comes into force. Companies with over 3,000 employees and turnover above €900m will be subject to the obligations after four years and all other companies only five years after the CSDDD first comes into force.

The member states have two years to transpose the CSDDD into national law. As far as Germany is concerned, this means that either the German Supply Chain Due Diligence Act will be undergo multiple amendments or a new law will be enacted.

C. Outlook

If the EU Parliament approves the CSDDD at the end of April, it remains to be seen how national legislators will implement the Directive. The adoption will give companies a certain degree of certainty in planning, and they should start preparing for the CSDDD now.

This implementation could also be an opportunity for companies to develop holistic supply chain management. After all, numerous European directives and regulations are aimed at making supply chains more transparent and recognising and eliminating risks.

In the next few weeks we will update you on the details of the CSDDD and other supply chain-related directives and regulations, such as the regulation on prohibiting products made with forced labour on the Union market, which is now almost ready.

Any questions?

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