On March 15, EU member states voted in favor of adopting a landmark new legislative act requiring companies to assess their third parties including supply chains for environmental and labor practices. Where countries like Germany and France already have regulations in place that align to the spirit of this directive, the EU Corporate Sustainability Due Diligence Directive (CSDDD) now requires all 27 EU member states to do the same. 

Despite being watered down from the proposal in December 2023, the CSDDD still creates a legal liability for damages if an EU company fails to prevent human rights and environmental harm in its own or its subsidiaries’ operations, products, or services or throughout its value chains.

The directive obliges firms to alleviate the adverse impact their activities have on human rights and the environment, including slavery, child labor, labor exploitation, biodiversity loss, pollution and destruction of natural heritage. The requirement to prevent, end or mitigate their negative effects also concerns companies’ upstream partners working in design, manufacture, transport and supply, and downstream partners, including those dealing with distribution, transport and storage.

Scope and Transition Plan 

The rules will apply to EU and non-EU companies and parent companies with over 1000 employees and with a turnover of more than 450 million euro and to franchises with a turnover of more than 80 million euro if at least 22.5 million was generated by royalties.

Companies will also have to integrate due diligence into their policies and risk management systems, and adopt and put into effect a transition plan making their business model compatible with the global warming limit of 1.5°C under the Paris Agreement. The transition plan should include the company’s time-bound climate change targets, key actions on how to reach them and an explanation, including figures, of what investments are necessary to implement the plan.

Civil Liability and Fines

Firms will be liable if they do not comply with their due diligence obligations and will have to fully compensate their victims. They will also have to adopt complaints mechanisms and engage with individuals and communities adversely affected by their actions.

Member states will designate a supervisory authority in charge of monitoring, investigating and imposing penalties on companies that do not comply. These can include fines of up to 5% of companies’ net worldwide turnover. Foreign companies will be required to designate their authorized representative based in the member state in which they operate, who will communicate with supervisory authorities about due diligence compliance on their behalf. The Commission will establish the European Network of Supervisory Authorities to support cooperation among supervisory bodies.