Corporate Sustainability Due Diligence Directive A new legal framework for sustainable

On 25 July 2024, Directive (EU) 2024/1760 (known as Corporate Sustainability Due Diligence Directive or CSDDD) entered into force.

The directive presents a new, ambitious regulatory framework that advances responsible business conduct with regard to human rights and environmental protection across global value chains. Member states have to transpose the directive into national law no later than 25 July 2026.

Large companies incorporated in the EU and specific non-EU companies operating in the EU are subject to the directive. The new responsibilities affect enterprises with more than 1,000 employees and a total worldwide revenue of over EUR450 million. Parent organizations of groups that meet these thresholds are also affected.

In the EU marketplace, the same criteria apply to non-EU enterprises that have large revenues. Businesses can also be included depending on earnings from royalties and aggregate turnover across the EU if the business operates via licensing or franchise arrangements in the EU.

Micro-enterprises and Small and Medium-sized Enterprises (SMEs) are explicitly excluded from the immediate application of the directive. But if they operate in value chains, they could be included in larger business partners' compliance protocols.

The directive introduces a thorough due diligence duty, requiring companies to incorporate human rights and environmental considerations into internal policies and risk management frameworks. Companies should pinpoint and gauge actual or potential negative repercussions. They also have to undertake preventative and corrective courses of action, keep watch over action effectiveness, and publish due diligence statements every year.

The directive obliges companies to develop and implement a climate transition plan to ensure they align with the Paris Agreement and broader sustainability objectives as it coordinates with the obligations arising from the Corporate Sustainability Reporting Directive (CSRD).

Companies have to assess and frequently revamp their governance structures, risk oversight protocols and reporting habits to adhere to these new mandates. The legal and insurance sectors are expected to play a key role. They will help businesses create adherence blueprints, handle lawsuit threats, and customize indemnity offerings for new accountability classifications, especially regarding ESG issues and corporate leadership vulnerabilities.

Domestic regulators will supervise and have the capability to undertake inspections and probes and administer penalties for infractions capped at 5% of the firm’s worldwide net revenue. The directive establishes a right to civil remedy for victims of corporate contraventions of human rights and environmental benchmarks as it augments avenues to justice and elevates potential litigation vulnerabilities.

The directive will be enacted progressively according to company size and revenue:

• Corporations with over 5,000 employees and EUR1.5 billion in turnover from 26 July 2027.
• Companies with over 3,000 employees and EUR900 million in turnover from 26 July 2028.
• Every other organization included from 26 July 2029. These businesses have over 1,000 personnel and EUR450 million in revenue.

We advise businesses to prepare for these regulatory changes by reviewing current due diligence frameworks and being proactive with respect to stakeholder engagement and sustainability governance. They should also assess the hardiness of their value chains. Taking action promptly will reduce legal and financial hazards and strengthen companies' standing and enable them to succeed in an ever more ESG-centric worldwide market.

Adopting these compliance measures also serves as a strategic safeguard to prevent and manage potential liabilities, including criminal ones, throughout the supply chain. Recent legal cases involving Italian companies have shown that control systems are essential when dealing with third parties.