Client Alert: Breakthrough for EU supply chain due diligence law: EU adopts compromise text

After many years in the making, the EU announced the approval on 24 May 2024 of its new Corporate Sustainability Due Diligence Directive (“CSDDD” or “Directive”).  This followed the Directive’s adoption by the EU Parliament on 24 April 2024 and the EU Council approving the Directive in March 2024 – just in time for the European Parliament’s final session before upcoming EU elections in June 2024.

Upon its entry into force, EU member States will need to adopt laws requiring companies based in or conducting business in the EU to comply with stringent new human rights and environmental due diligence standards – or face significant consequences, including penalties of 5% turnover or more.  They should begin preparing now by examining their business and human rights practices closely.

The Directive proposes significant new due diligence requirements on companies in relation to human rights and environmental adverse impacts, backed with procedures to “name and shame” and maximum penalties of at least 5% of net worldwide annual turnover.  It extends to all EU companies with a minimum 1,000 employees and minimum worldwide turnover of EUR 450 million.  It also includes non-EU companies doing business in the EU if they meet the same minimum turnover threshold within the EU (without any further minimum employee threshold).  Parent companies can also be caught on the basis of group turnover thresholds or franchising or licensing royalty thresholds.

Under the CSDDD, these companies will face legally binding obligations of enhanced human rights and environmental due diligence.  Notably, these obligations extend beyond the company’s own adverse impacts to include those of its subsidiaries and direct and indirect business partners – defined broadly to include any “entity … which performs business operations related to the operations, products or services of the company” (emphasis added).

Under certain circumstances and as a last resort, companies caught within the scope of the CSDDD shall be required to refrain from or terminate business relationships with certain business partners because of their impacts on human rights or the environment.  EU Member States must also ensure that companies caught by the Directive can become civilly liable for damage if they do not take appropriate measures: (i) to prevent or mitigate potential adverse human rights impacts; or (ii) to bring actual adverse human rights impacts to an end.

Companies caught within the scope of the CSDDD will also be required to adopt and implement “transition plans” for climate change mitigation.  Such plans must set out how the company will ensure that its operations are “compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C” under the Paris Agreement.  Companies will be required to update their plans annually, including to report on progress towards targets.

Comment

The CSDDD has attracted widespread controversy and criticism.  Just a few weeks prior to the European Council’s approval in March 2024, approval had appeared out of reach after Germany withdrew support.  Other countries rapidly followed suit, following concerns about excessive bureaucracy and burdensome requirements for small business.  The final version of the text is notably diluted from an earlier provisional draft.  Proponents of the CSDDD in its original form have expressed disappointment at the removal of earlier stricter requirements.  Conversely, several major business groups – including the German Chamber of Commerce and Industry, Italy’s General Confederation of Italian Industry and the China Chamber of Commerce to the EU – continued to voice concerns over increased bureaucracy and onerous trickle-down impacts for small business.

Whether viewed as excessive bureaucracy or not going far enough, enhanced due diligence requirements appear set to remain as a major part of the global business landscape.  Prudent companies, whether based within or outside the EU, will be preparing now with specialist legal advice to avoid potential fines, litigation risks and additional operational expenses.

For further information, please contact info@volterrafietta.com.