On May 24, 2024, the EU Parliament approved the Corporate Sustainability Due Diligence Directive (CSDDD), establishing stringent new requirements for large companies operating within and outside the EU to conduct thorough due diligence on human rights and environmental impacts. The directive applies to companies with significant employee counts and financial turnovers and includes those engaged in franchising or licensing agreements. Companies must now undertake effective measures to prevent, mitigate, and address adverse human and environmental impacts. This involves developing action plans, ensuring contractual compliance from business partners, and supporting small and medium enterprises in their networks.
The directive requires companies to engage meaningfully with stakeholders, maintain robust complaint mechanisms, and publicly report their due diligence activities annually. Additionally, it mandates the creation of climate transition plans aligned with the Paris Agreement to limit global warming to 1.5 °C, which includes setting targets for reducing dependency on high-emission energy sources.
The CSDDD will be enforced by supervisory authorities in EU Member States, which will have the power to impose penalties, including fines up to 5% of a company’s annual global turnover for non-compliance. The phased implementation schedule requires the largest companies to comply within three years from the directive’s enactment, with smaller companies following in subsequent years.
As the directive is subsequently integrated into national laws, it aims to create a level playing field across Europe, ensuring all businesses contribute positively to human rights and environmental sustainability. This marks a significant step forward in corporate governance, potentially setting a global standard for corporate responsibility. This is relevant for legal regulators as it plays into the increasingly heated debate about the role of general counsel in companies and external lawyers in overseeing compliance on behalf of their clients.