EU Approves Landmark Sustainability Due Diligence Law for Corporations

The European Council has officially adopted the Corporate Sustainability Due Diligence Directive (CSDDD), establishing mandatory obligations for large companies to address their negative impacts on human rights and the environment across their value chains. This marks the final step in a legislative process aimed at holding corporations accountable for their global operations.

Initially proposed by the European Commission in February 2022, the CSDDD requires companies to identify, assess, prevent, mitigate, address, and remedy impacts on human rights and the environment. These impacts include issues such as child labor, slavery, pollution, emissions, deforestation, and ecosystem damage. Companies must also adopt transition plans to align with the Paris Agreement’s goal of limiting global warming to 1.5°C, and member states are mandated to establish supervisory authorities to investigate and penalize non-compliant firms.

The directive faced significant hurdles over the past months. An earlier version failed to gain approval, necessitating revisions that scaled back the number of companies covered and extended the timeline for full implementation. The legislation saw further delays due to concerns from Germany and Italy about its bureaucratic and legal impacts, ultimately leading to a vote postponement in January 2024.

Key compromises were made to secure the directive’s passage. The thresholds for company inclusion were raised to firms with at least 1,000 employees and revenue exceeding €450 million, reducing the scope by approximately two-thirds. High-risk sector thresholds were removed, with potential reconsideration in the future.

The phased implementation begins in 2027 for companies with over 5,000 employees and revenues greater than €1.5 billion. Companies with more than 3,000 employees and €900 million revenues will follow in 2028, with all other covered companies coming under the law in 2029. The revised directive also removed the requirement for companies to promote climate transition plans through financial incentives.

The EU Council tweeted on May 24, 2024: “Companies will need to identify and mitigate any adverse impact on human rights and the environment, with respect to their own operations, those of their subsidiaries, and those carried out by their partners.”