The CSDD Directive holds companies accountable for the impacts of their operations

The CS3D has received much attention during this spring as it received backlash from various member states. In the end, certain changes were made to the scope of the directive and the requirements around civil liability. On 14 December 2023, the European Council and the European Parliament announced that they had reached a provisional agreement on the text of the CS3D. However, the political agreement on CS3D failed to gain sufficient support by the EU Member States in February 2024. In March 2024, the Council voted in favour of the amended CS3D, and on 24 April 2024, the Parliament adopted its final text in plenary. On 24 May 2024, the directive was finally approved by the ministers in the Competitiveness Council, and the directive will enter into force on the 20th day following its publication in the EU Official Journal.

The directive is applicable to EU companies having more than 1,000 employees and a net worldwide turnover exceeding EUR 450 million and to companies established outside of the EU with a turnover exceeding EUR 450 million from the EU. The directive includes rules that concern groups of companies. The directive is also applicable to licensors/franchisors that have a turnover of more than EUR 80 million and that receive significant royalties (more than EUR 22,5 million) based on franchising or licensing agreements.

The practical implementation of the due diligence processes calls for systematic and continuous activities that are reflected throughout the chain of operations. The process itself is not new as the voluntary UN Guiding Principles on Business and Human rights and OECD Guidelines for Multinational Corporations already set a similar standard and process for companies to consider their adverse impacts. However, the CS3D is not soft law, unlike the UN Guiding Principles and OECD Guidelines.

In practice, companies must set a process that will integrate due diligence into their policies and risk management systems;

• identify, assess and (where necessary) prioritise potential and actual adverse impacts;

• prevent and mitigate potential adverse impacts;

• bring actual adverse impacts to an end or minimise their extent;

• remediate actual adverse impacts;

• carry out meaningful engagement with stakeholders;

• establish and maintain a notification mechanism and complaints procedure;

• monitor the effectiveness of their due diligence policy and measures; and

• communicate publicly on due diligence. Companies will be required to publicly communicate on their compliance with the CS3D, where they are not already subject to the reporting requirements of the Corporate Sustainability Reporting Directive.

The directive provides for effective means to combat climate change. Member states shall ensure that companies within the scope of the directive adopt and put into effect a transition plan for climate change mitigation, which aims to ensure, through best efforts, that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1,5 ºC in line with the Paris Agreement. This transition plan shall contain time-bound targets for 2030 and five-year steps up to 2050 based on conclusive scientific evidence and including, where appropriate, absolute emission reduction targets. The emission reduction targets shall concern greenhouse gas emissions in scope 1, scope 2 and scope 3.

The transition plan shall include concrete information of potential changes in the company’s product and service portfolio, adoption of new technologies, investments and funding supporting the implementation of the transition plan as well as the role of the administrative, management and supervisory bodies regarding the plan.

Given that scope 3 emissions are included in the required emission reductions, the impact of the directive goes far beyond the companies that are directly within the scope of the directive. Indirectly, the directive will have a major impact on companies within the upstream and downstream value chain of the companies bound by the directive. This means that we are likely to see a network of agreements between companies requiring emission reductions in line with the Paris Agreement.

Member states have until 2026 to implement the legislation, and the application begins in 2027 with companies with over 5,000 employees and revenue of EUR 1.5 billion. The second stage of application in 2028 is companies with over 3,000 employees and revenue of EUR 900 million and the third stage is by 2029 for companies with over 1,000 employees and revenue of EUR 450 million.

Failure to comply with the directive could lead to a sanction of up to 5% of the company’s global turnover. National implementation of the directive will determine the final sanctions and the determined authority to oversee the directive in Finland. As noted in our blog, there is a clear rise in impact litigation around Europe, and the CS3D will allow a new avenue as a company can be held liable for damage caused to any person where the company has failed, intentionally or negligently, to comply with the due diligence obligations of CS3D.