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In the plenary session of 24 April 2024, the European Parliament – with 374 votes in favour, 235 against and 19 abstentions – approved the final text of the Corporate Sustainability Due Diligence Directive (Directive 2024/1760/EU – ‘CSDD’). The adoption process of the directive was formally concluded on 24 May 2024 with the favourable vote cast by the Council of the Union.
The directive was published in the European Official Gazette on 5 July 2024 and entered into force on 26 July 2024.
Member States will have to transpose the CSDD into their national legislation by 26 July 2026.
Although the current version of the directive is affected by the compromise reached between the individual states in March 2024 – in fact, its scope of application has been scaled down compared to the original proposal – its disruptive scope is undeniable, just as the modifying impact it will have in the coming years on the strategic choices of business operators and on the market as a whole is unquestionable.
The aims, purposes and basic assumptions of the directive concur to define a particularly innovative legal and political-economic perspective, the originality of which is plastically evident in the more than ninety “Whereas” that constitute the premises of the regulatory text. A perspective, this one, characterised first and foremost by the importance attributed to the value dimension at the foundation of the Union, as well as by the belief that, in order to guarantee the promotion and effective implementation of the founding values of the European Union itself, the active involvement, in general, of all private subjects and, in particular, of businesses, is necessary and imperative.
The CSDD introduces, for companies with certain structural characteristics, a series of obligations relating to the management of negative impacts on human rights and the environment that occur – or may occur, even potentially – within the scope of their own activities, the activities of their subsidiaries and those of their business partners; obligations made effective by mechanisms capable of enforcing corporate liability in the event of their violation.
The directive also imposes an obligation on the same companies to adopt and implement a transition plan for climate change mitigation, with the specific aim of ensuring the compatibility of business models and strategies with the 2015 Paris Agreement objectives of limiting the increase in global warming within 1.5 °C.
The subjective scope of application of the CSDD – defined on the basis of mostly size-related parameters – includes companies that fulfil certain conditions, set out in Article 2 of the directive, relating mainly to the level of net turnover and the number of employees.
More specifically, for companies incorporated under the law of a Member State, the application of the CSDD is subject to having had, in the last financial year, more than 1,000 employees and a net turnover, worldwide, exceeding EUR 450,000,000. The European legislator also expressly provided that companies that head groups that have reached the minimum levels of turnover and number of employees mentioned above, as well as companies that have concluded franchising or licensing agreements with third companies in the European Union in return for royalties exceeding EUR 22,500,000 and have a worldwide net turnover exceeding EUR 80,000,000, are subject to the obligations set forth by the directive.
The CSDD also applies to non-EU companies that generate revenues in the territory of the Member States: in this case, the application of the CSDDD is subject to the same requirements mentioned above, with the exception of the minimum number of employees requirement.
With specific regard to groups of companies, the CSDD then considers the hypothesis in which the main activity of the parent company consists of participation in companies and does not involve the adoption of management decisions that may affect the group or one or more of its subsidiaries; in this case, it expressly provides for the exemption of the parent company from fulfilling the obligations under the directive, provided that one of its subsidiaries is designated to fulfil those obligations on behalf of the parent company.
However, in order for the requirements of the CSDD to apply in practice, it is required that the companies involved meet the above-mentioned conditions for two consecutive financial years.
According to Article 5 of the directive, companies falling into the categories considered here must conduct “risk-based human rights and environmental due diligence” and this, clearly, with the primary aim of preventing or reducing negative impacts that may arise in these areas.
In this perspective, each company will therefore be required to implement a series of specifically identified actions, such as: integrating the duty of care into its risk management policies and systems; identifying, assessing, preventing and mitigating, with appropriate measures, the negative impacts arising from its business, whether actual or potential, and prioritising these impacts; providing adequate remedies against the occurrence of a negative impact; engaging in a meaningful dialogue with stakeholders; establishing an appropriate mechanism for reporting and complaining about adverse impacts brought by the company; assessing periodically the effectiveness and adequacy of the policies and measures adopted; and publishing an annual statement on its website acknowledging the activities carried out to prevent or mitigate adverse impacts on human rights and the environment.
With a view to promoting sustainable economic development, the European legislator, with the regulatory framework briefly outlined here, also intended to regulate the management of negative impacts on the environment and rights within the ‘chain of activities’ of companies (so-called ‘supply chain’).
Indeed, the due diligence obligations introduced by the CSDD also apply to companies in relation to the activities of their business partners.
In this perspective, the reference to the activities of business partners encompasses, on the one hand, the activities carried out ‘upstream’ of a company falling within the scope of the directive, i.e. business activities related to the production of goods and the provision of services offered by that company, and, on the other hand, activities carried out ‘downstream’, concerning the distribution, transport and storage of the company’s products. In other words, large companies will have to identify, prevent, mitigate, reduce or stop negative impacts, on human rights and the environment, that may occur, or actually do occur, throughout the value chain.
But that is not all. In order to ensure exact compliance with the obligations of the CSDD, each Member State will have to designate one or more supervisory authorities.
According to what is expressly stated in the text of the directive, these authorities will be able to: 1) conduct investigations – either ex officio or following specific notifications – into alleged infringements by a company of the provisions of national law that will have transposed the discipline of the directive; 2) carry out inspections, subject to prior notice to the company involved and in full compliance with the national law of the Member State in which the inspection will take place; 3) order the company under investigation to put an end to the infringement detected, to refrain from any repetition of the conduct and, where appropriate, to provide proportionate remedies. Moreover – and this is, perhaps, the most relevant aspect – the supervisory authorities will also have the power, in the event of proven violations, to impose the relevant sanctions.
With regard to the latter point, the legislative framework of the CSDD generally leaves the individual Member States some room for manoeuvre, leaving it up to them to determine the penalties, provided that they are effective, proportionate and dissuasive.
Member States must, in any event, provide for financial penalties, the maximum amount of which may not be less than 5% of the worldwide net turnover of the company in the financial year preceding the adoption of the decision imposing the financial penalty. In the event of non-compliance with the obligations of prevention and/or interruption of negative impacts, the discipline introduced by the directive specifies that the company may be held civilly liable for damages caused – as a result of such non-compliance – to natural and legal persons; subjects, these, to whom the CSDD expressly recognises the right to obtain full compensation in accordance with specific national regulations. However, civil liability of the company is excluded if the damage was caused exclusively by its business partners within its value chain.
Lastly, it must be emphasised that the CSDD will be applied according to the gradualistic approach outlined in Article 37, which Member States will clearly have to take into account when transposing it.
In particular, the obligations under the directive will concern: