From dodo to phoenix, EU's Corporate Sustainability Due Diligence Directive emerges from the ashes

Very rarely, there will be an EU draft directive that seems deader than the dodo – only for it to emerge triumphant as a phoenix from the ashes. The last time I saw this was with the Solvency II directive in 2012 – hundreds of contractors in London’s insurance sector found their contracts terminated almost overnight, only for the directive to come back with a bang a few months later. Three weeks ago, the EU’s Corporate Sustainability Due Diligence Directive seemed dead in the water; with European Parliament elections looming, Belgium handing over the EU Council presidency to Hungary, and a new European Commission in the offing, time had simply run out to get the directive approved (or so we thought).

Today's agreement was finally reached on a directive that is substantially watered-down from its earlier versions, leaving many stakeholders calling it “too little, too late”. Many CFOs and CROs will likely be breathing a sigh of relief however – implementing CSDDD in the same timeframe as the Corporate Sustainability Reporting Directive (CSRD) was always going to be an uphill struggle.

Companies in scope will be expected to implement practices to mitigate, reduce or prevent environmental and human rights abuses in their business and supply chain. Crucially, the scope is now focused on ‘direct’ business relationships – i.e. companies will not be expected to look beyond their immediate suppliers and distributors, or consider the downstream circular economy. EU and non-EU groups with more than 1,000 employees and EU turnover exceeding €450 million will come into scope in three stages, with the largest groups first:

1. 2027: companies with more than 5,000 employees and €1.5bn EU revenue
2. 2028: companies with more than 3,000 employees and €900m EU revenue
3. 2029: companies with more than 1,000 employees and €450m EU revenue

The final text is far from perfect – there are no requirements for meaningful engagement with stakeholders, for example – but will be considerably easier for businesses to implement in the regulatory timetable. Companies should start to prepare now by updating their supply chain management processes and reporting to their audit and risk committees on due diligence measures.