European Commission Releases Initial Guidance on the CSDD

Introduction to the CSDDD

On July 25, 2024, the European Commission introduced initial guidance on the Corporate Sustainability Due Diligence Directive (CSDDD), also referred to as CS3D. This guidance, presented in the form of Frequently Asked Questions (FAQs), is available on a dedicated webpage. This approach mirrors the Commission's strategy for other EU due diligence sectoral regimes, such as the EU Deforestation Regulation and the EU Conflict Minerals Regulation.

Transposition and Implementation Timeline

EU Member States are required to transpose the CSDDD into national law by July 26, 2026. The rules will come into effect in a phased manner starting on July 26, 2027. In addition to national transposition measures, the European Commission will need to adopt delegated measures, including model contractual clauses and various guidelines, by January 26, 2027 (or July 26, 2027, depending on the measure). The FAQs published are part of these preparatory steps.

Key Points from the FAQs

1. General Overview

The FAQs provide a high-level summary of the CSDDD’s aims and the due diligence duties it imposes on companies. Detailed summaries are available in previous publications.

2. Objectives

a. The Commission highlights three main reasons for legislative intervention
b. Insufficiency of Voluntary Frameworks: Existing international frameworks are inadequate for ensuring comprehensive integration of sustainability into company operations.
c. Legal Uncertainty: Existing Member States’ due diligence laws contribute to market fragmentation, necessitating harmonized EU legislation.
d. Enhanced Business Performance: Integrating sustainability enhances risk management, resilience, and competitiveness of EU businesses.

3. Entry into Force and Application

The CSDDD aligns with international standards like the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises, with necessary adaptations for its mandatory nature.

The directive will apply to in-scope companies in a phased approach:

b. From July 26, 2027: Companies with over 5,000 employees or EUR 1,500 million worldwide net turnover, and non-EU companies with over EUR 1,500 million net turnover in the EU.
c. From July 26, 2028: Companies with over 3,000 employees or EUR 900 million worldwide net turnover, and non-EU companies with over EUR 900 million net turnover in the EU.
d. From July 26, 2029: All other in-scope companies.

4. Scope and Exclusions

a. The CSDDD will apply to around 6,000 EU companies and 900 non-EU companies. Financial undertakings must adopt climate transition plans but are exempt from certain due diligence obligations related to financial services provided to clients.
b. Small and medium-sized enterprises (SMEs) not directly covered by the CSDDD may still face indirect impacts as business partners to in-scope companies.

5. Material Scope

a. The CSDDD addresses adverse human rights and environmental impacts resulting from violations of multilateral conventions listed in its Annex. This includes measurable environmental degradation such as soil change, water pollution, and land degradation.

6. Content of Obligations

Companies must adopt a risk-based approach to due diligence, focusing on preventing, mitigating, and addressing adverse impacts. Disengagement from business partners is a last resort after other measures fail. Administrative sanctions may apply for non-compliance with due diligence or transition plan requirements.

7. Enforcement

Enforcement will involve supervisory authorities in each Member State and a civil liability regime. Non-compliance may affect eligibility for public and concession contracts. Enforcement actions can also target third-country companies.

8. Burden Limitation and Safeguards

The Commission aims to reduce the compliance burden through delegated measures, including guidance on industry schemes and digital tools. There will be no new reporting requirements for companies already reporting under the Corporate Sustainability Reporting Directive (CSRD).

9. Impacts of the Directive

The CSDDD aims to improve human rights protection, enhance corporate accountability, and contribute to environmental sustainability. For companies, it promises a harmonized legal framework, increased customer trust, and enhanced risk management. The Commission emphasizes the need for coordination with third countries to amplify these benefits through stronger rules and international cooperation.

The FAQs mark the beginning of a detailed regulatory framework intended to strengthen corporate sustainability practices across the EU and beyond.