Legislation

12th March 2025

What is Corporate Sustainability Due Diligence Directive (CSDDD)

The Corporate Sustainability Due Diligence Directive (CSDDD), also known as the CS3D, mandates that companies carefully manage the social and environmental impacts across their entire value chain, covering both direct and indirect suppliers as well as their own operations.

The directive requires businesses to take measures to implement climate action plans, but without the obligation to achieve specific results. The primary goal is to ensure compliance with human rights and environmental protection standards to foster a more sustainable and fair global economy.

As EU Justice Commissioner Didier Reynders highlighted when introducing the draft, “only companies that do not harm the environment and fully respect human rights should operate in the EU.”

Current Status and Next Steps

The EU Parliament approved the CSDDD on April 24, 2024. Following this, the directive is expected to receive final political approval from EU ministers in May 2024. Once approved, the CSDDD will be published at COREPER on May 15 and at the COMPET meeting on May 23. Afterward, national transposition and implementation processes can begin.

Member states will have two years to transpose the directive into national law and submit their respective legislations to the EU Commission. The national laws will then be enforced according to company size, with full scope application taking effect five years after adoption.

Germany will need to amend its Supply Chain Act (LkSG), which has been in force since January 2023.
 

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Which Companies are in Scope?

The CSDDD applies to European companies that meet the following criteria:

•    Limited liability status
•    More than 1,000 employees
•    Annual turnover exceeding €450 million worldwide

While small and medium-sized enterprises (SMEs) are not directly affected, they may face indirect consequences, especially if they serve as suppliers to larger companies within the scope of the directive. Different timelines apply depending on the company's size and turnover:

•    Three-year grace period for companies with over 5,000 employees and €1.5 billion in turnover.
•    Four-year grace period for companies with more than 3,000 employees and €900 million in turnover.
•    Five-year grace period for companies with more than 1,000 employees and €450 million in turnover.

What Are Companies Required to Do Under the Law?

Companies that fall under the CSDDD must meet their corporate due diligence obligations across their supply chains regarding both human rights and environmental impacts. The steps include:

1.    Identifying Negative Impacts: Companies must identify actual or potential adverse impacts on human rights and the environment and take appropriate steps to prevent, mitigate, and remedy them. High-risk industries must focus on serious violations in their sector.
2.    Integrating Due Diligence into Company Policies: Due diligence should be embedded into corporate policies and management systems.
3.    Complaints Procedure: Companies must establish a process for complaints that ensures accessibility for all along the supply chain.
4.    Transparency: Companies must provide transparent, public information about how they are fulfilling their due diligence obligations, including an annual report.
5.    Monitoring and Effectiveness: Companies must actively monitor and control the effectiveness of their measures.
6.    Climate Transformation Plan: Companies with an annual turnover exceeding €150 million must outline how they will contribute to meeting the Paris Climate Agreement's emission reduction targets through a transformation plan.
7.    Board Responsibility: Supervisory and administrative boards must ensure compliance with due diligence obligations and receive relevant information from management.
Unlike Germany’s LkSG, which mainly covers the company’s direct operations and suppliers, the CSDDD extends to both upstream and downstream activities, meaning indirect suppliers are also affected.

What Violations Are Covered by the Law?

The CSDDD holds European companies accountable for ensuring that they, their users, and their suppliers respect the following:

•    Human Rights: Companies must respect fundamental workers' rights (such as the International Labour Organization (ILO) core labour standards), including freedom of association, the prohibition of child and forced labor, and equal pay.
•    Biodiversity and Ecosystem Protection: Respecting and preserving biodiversity and ecosystems within supply chains is a key requirement.
•    Environmental Protection: Companies must ensure that their activities do not harm the environment, including combating climate change and preventing pollution.

How CSDDD Differs from the LkSG

While Germany's Supply Chain Act (LkSG), passed in June 2021, focused primarily on a company’s own operations and direct suppliers, the CSDDD goes much further by covering both upstream and downstream activities. This includes the entire supply chain, from raw material extraction to transportation, storage, and disposal. Importantly, the CSDDD also introduces civil liability for companies, with the possibility of claims extending beyond five years.

The CSDDD thus requires more comprehensive checks across the entire value chain compared to the German law, which focuses primarily on direct suppliers, with indirect suppliers only considered when violations are substantiated.

How Companies Can Best Prepare for the CSDDD

To comply with the CSDDD, companies must assess their entire supply chain—both upstream and downstream. This includes tracking the origin of goods, production processes, and environmental or climate-related consequences. If sourcing from third-world countries, this may present a particularly significant challenge.

To ensure compliance in a legally secure way, companies should conduct a continuous and comprehensive risk assessment. A flexible business partner audit can help document and verify the fulfillment of due diligence obligations. Additionally, a digital whistleblower system will help implement the required complaints procedure, further ensuring that all legal obligations are met.

What Does the Law Mean for SMEs?

While SMEs are not directly impacted by the CSDDD, they will likely face indirect effects as large companies begin to enforce due diligence obligations within their supply chains. SMEs that proactively prepare for these requirements may gain a competitive edge in the market.

The CSDDD includes support measures for SMEs, such as state aid to help cover the costs of compliance, alleviating the burden on smaller businesses.

The Road to the CSDDD

The journey toward the CSDDD began in December 2020, when all 27 EU member states endorsed a European supply chain law. The proposal gained momentum with the European Parliament’s adoption of the legislative proposal in March 2021. The EU Commission then released a draft in February 2022, and by June 2023, the European Parliament voted in favor of the directive. A provisional agreement was reached on December 14, 2023, and despite some setbacks, the directive was approved by the European Parliament on April 24, 2024. The final adoption is expected in May 2024, after which national transposition processes will begin.

Does the CSDDD Go Too Far or Not Far Enough?

Critics argue that the CSDDD does not go far enough, pointing out that many companies below the threshold will not be impacted by the law. Others worry about the increased burden on businesses, especially those already struggling with the aftermath of the pandemic. Concerns have also been raised about the potential competitive disadvantage the law could create for European businesses compared to their global counterparts.

However, one major advantage is that the CSDDD ensures uniformity across the EU. Without it, individual countries might have enacted differing laws like the LkSG in Germany, leading to inconsistent regulations across the region.

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Why Do We Need a European Supply Chain Law?

The need for a European supply chain law is clear: to protect human rights and the environment. Millions of people around the world suffer under inhumane working conditions, including forced labor and child labor. The exploitation of workers and the destruction of the environment along global supply chains has long-lasting consequences. The EU’s legislation aims to tackle these issues head-on and enforce better standards globally.

In conclusion, the CSDDD represents a significant step toward responsible corporate governance. By holding companies accountable for their supply chains, it aims to create a more equitable and sustainable global economy.

As the law comes into effect, businesses must prepare to navigate its requirements to remain competitive and compliant in an increasingly globalised and conscientious market.

Extnernal Sources and legislation updates can be found via the below: 

Eurpoean Commission 
European Sources Online 
Stanford Law School