EU Corporate Sustainability Due Diligence Directive Takes Effect

The European Union’s Corporate Sustainability Due Diligence Directive takes effect July 25, 2024, marking a significant advancement in requiring companies to integrate responsible business practices into their due diligence processes and policies. An article by Latham & Watkins explores the details of the directive, which was published in the Official Journal of the EU earlier this month.

Initially proposed in February 2022, the Corporate Sustainability Due Diligence Directive (CSDDD) will establish a comprehensive due diligence framework across the EU, affecting both EU and non-EU companies. 

It complements existing due diligence legislation in several EU member states, such as the German Supply Chain Act and the Norwegian Transparency Act. Unlike these specific acts, however, the CSDDD provides a comprehensive due diligence framework for in-scope companies.

The directive applies to a broad range of companies that have significant operations in the EU market and will be phased in based on company size and turnover. EU companies with more than 1,000 employees and a global turnover exceeding $490 million, and non-EU companies with an EU turnover of over $490 million fall under the CSDDD’s scope. 

To be included, franchised EU companies must have over 1,000 employees, a $490 turnover exceeding $87 million, and generate royalties of more than $25.5 million. Companies will be subject to the directive’s requirements starting in 2027.

Key aspects of the CSDDD include companies’ obligation to identify, prevent, and mitigate adverse human rights and environmental impacts associated with their operations. 

Companies must integrate due diligence into their policies, assess potential adverse impacts, implement preventative measures, establish complaint mechanisms, monitor the effectiveness of their measures, and publicly report their efforts. 

Non-compliance penalties include fines of up to 5% of a company’s net worldwide turnover and a civil liability scheme for companies failing to meet due diligence obligations.