Corporate liability under the CSDDD.

The CSDDD is a corporate sustainability due diligence directive that was announced on 5 July 2024 by the European Commission. The directive entered into force on 25 July 2024 and, from that date, Member States have two years to transpose the provisions of the CSDDD into their national legal order.

The introduction of this directive is a further step by the European Union to counter the negative effects of doing business and aims to improve respect for human rights and compliance with environmental legislation by introducing a due diligence obligation.

What is to be understood by due diligence?

The CSDDD refers, in defining due diligence, to earlier international regulations. On this basis, it should be specified that due diligence is a process that companies should carry out in order to identify actual and potential negative impacts of their activities, as well as to prevent and mitigate negative impacts arising (or likely to arise) from their activities (both in the company’s core business and supply chain, as well as in other business relationships). Consequently, due diligence is based on risk analysis.

The directive sets out the appropriate actions to exercise due diligence based on its provisions and these include:

• integrating due diligence into company policies and their risk management systems,
• identifying and assessing actual or potential impacts and, where necessary, prioritising actual and potential adverse impacts,
• preventing and mitigating potential adverse impacts and removing actual adverse impacts and minimising their extent,
• providing remediation for actual adverse impacts,
• working constructively with stakeholders,
• establishing and applying a notification mechanism and complaints procedure,
• monitoring the effectiveness of the due diligence policy and measures in place,
• making due diligence information public,
• adopting and implementing a transformation plan for climate change mitigation.

Who will be obliged to comply with the provisions of the CSDDD?

The Directive will apply to both EU and non-EU entities. We can divide the companies covered by the directive into the following groups:

1. companies which, in the most recent financial year for which annual accounts have been or should have been prepared, had more than 1,000 employees and more than EUR 450 million in net sales worldwide,
2. companies which did not themselves meet the aforementioned thresholds, but were the highest parent company in the group which met these thresholds,
3. companies which had more than 1,000 employees in the last financial year for which annual accounts were or should have been prepared, and which themselves have concluded or are the ultimate parent company of a group which has concluded franchise or licence agreements in the EU with independent third-party companies for royalties of more than EUR 22.5 million, if these agreements ensure a common identity, a common business concept and the application of uniform business methods.

In addition, for non-EU entities, the premise of having the number of employees specified in the Directive does not apply and their obligation to comply with the provisions of the Directive will arise from exceeding financial thresholds. This applies to both parent companies and companies that have entered into franchise and licence agreements.

It should be pointed out, however, that the CSDDD introduces a gradual approach to the application of the rules set out therein. It is only after a period of 3 years from its entry into force that the largest EU companies, will be obliged to comply with the provisions of the directive.

Furthermore, where the parent company is not involved in management, operational or financial decisions affecting the group, it may be exempted from fulfilling the obligations set out in the directive and delegated to a subsidiary. In such a situation, both the parent company and the subsidiary are jointly liable.

What are the penalties for failing to comply?

Under the CSDDD, the maximum limit for fines is at least 5% of the undertaking’s worldwide net sales revenue in the financial year preceding the year in which the decision to impose the fine is taken. However, it should be borne in mind that member states will set effective, proportionate and dissuasive penalties, including fines, in national law.

In addition, entities covered by the CSDDD are liable to civil liability to individuals or companies for damages caused by their infringements, in accordance with national law.