Directive on Corporate sustainability due diligence (CSDD) in the EU: what impact on non-EU groups ?
Jacques Perotto and Maxime Hermes
A normative frenzy?
In the framework of the “green deal” to achieve climate neutrality in Europe in 2050, the EU Commission and Parliament have issued many new rules in environment and ESG matters. At which point some of the member states leaders (France, Belgium…) have called for a “break” in the normative activity, to allow some time to assimilate the new provisions.
What is true is that the number and scope of the new and upcoming rules might seem somewhat overwhelming to companies: the SFDR (reporting on sustainable financial products), taxonomy (definition of sustainable activities), the CSRD (corporate sustainability reporting), the CSDD (sustainability due diligence), the ETS (revision of quota trade), the CBAM (carbon tax for importations), the SCF (social climate fund) … quite a list!
However, this succession of texts is no random pile, and the EU seeks consistency and complementarity between the rules. In the preamble of the CSDD recently voted by the EU Parliament (and not formally adopted yet), the complementarity with CSRD is “to increase effectiveness of both measures [CSRD and CSDD] and drive corporate behavioral change for those companies.”
What is CSDD about?
The CSDD introduces in an EU directive a “duty of vigilance” for companies falling into its scope, to perform a due diligence of their impact on environment, sustainability, social and human rights, not only in their own activities (already addressed in the CSRD), but also throughout the value chain (i.e. all upstream and downstream business relationships for the production of goods and services).
Once this due diligence has been conducted, companies will have to do their best to eliminate or at least mitigate the risks, which will depend on their capacity to influence their business partners.
The duty of vigilance shall be included in the corporate governance policies, controlled internally and give lieu to public communication.
Member states shall include sanctions for any transgressions by companies in their transposition of the CSDD, as well as civil liability mechanisms and public control. In France, where a similar obligation has existed with a more restrictive scope since 2017, some trials, mostly initiated by NGOs, are ongoing against major companies (TotalEnergies, BNP Paribas, La Poste…) based on insufficient endeavors.
The companies will bear the costs of the due diligences and the resulting changes in their organization. In this regard, the European legislator has included companies from third countries operating in the EU within the scope of the Directive, which should reduce the competition distortion for EU companies, and could trigger changes of corporate habits outside EU borders too.
How CSDD will directly impact foreign companies?
Some foreign groups will fall directly within the scope because of their subsidiaries or activities in the EU, when fulfilling conditions of turnover.
The scope thresholds are not yet final, as the Directive has entered through its final stage of discussions between the EU Council, Commission and Parliament.
The first two had agreed on thresholds, depending on sectors, with “high-impact” sectors (textiles, agriculture and extraction-related) being more easily subject to the duty of vigilance.
The Parliament has adopted a wider position, with overall reduced thresholds, for a more ambitious text.
According to EU estimations (based on the Commission / Council thresholds), around 4,000 non-EU companies would be directly impacted.
Once formally adopted, after the ongoing discussions between the member States (probably sometime in 2024), the duty of obligation will apply between 2 and 5 years to companies, depending on their size. This schedule would be consistent with the one regarding the reporting on sustainability (CSRD), which also impacts some foreign companies.
| Who ? | Commission and Council | Parliament |
| EU companies | · more than 500 employees and · net worldwide turnover of MEUR 150 Application 2 years after publication · more than 250 employees and · net worldwide turnover of MEUR 40 if more than 50% of that turnover is generated in high-impact sectors Application 4 years after publication | · more than 250 employees and · over MEUR 40 in net worldwide turnover Application between 3 and 5 years after publication |
| Non-EU companies | · net EU turnover of MEUR 150 Application 2 years after publication · net EU turnover of MEUR 40 if more than 50% of that · turnover is generated in high-impact sectors Application 4 years after publication | · net worldwide turnover of MEUR 150 if at least MEUR 40 was generated in the EU Application between 3 and 4 years after publication |
| EU parent companies of a group | · More than 500 employees and · over MEUR 150 in net worldwide turnover | |
| Non-EU parent companies of a group | · More than 500 employees and · over MEUR 150 in net worldwide turnover if at least MEUR 40 was generated in the EU Application between 3 and 4 years after publication |
How CSDD may indirectly impact foreign companies?
The indirect impact must not be neglected either: many companies not falling within the scope of the CSDD have intricate business links with companies subject to the duty of vigilance obligation.
The latter will apply their due diligence and risk-mitigating obligations, which will inevitably have an impact on their business partners.
The appreciation of the “best endeavors”, and therefore the impact on foreign companies, will depend on the capacity of the debtor of the obligation to get what it requests:
- A company performing its due diligence towards a business partner for which it represents a limited volume of activity, best endeavors could be achieved by requiring information and sending a few reminders, depending on the willingness of the foreign company to comply.
- On the contrary, economically dependents partners in the value chain will to some extent be forced to provide detailed information when instructed, and being summoned to modify some of their ways, if not compatible.
When to prepare?
There is time before the duty of vigilance enters into force, but it is recommended to use this time to prepare, especially for companies within the scope of the CSDD, as the adaptation requires a certain volume of work, and has impact on corporate governance. For example, it could be considered to start favoring partners applying ESG principles compatible with the EU provisions to eliminate the risks ahead.
For companies only indirectly impacted, it is advisable to start a reflection on how they will respond to due diligences requests and react to change of habits. And, as usual, power lies behind the money: powerful EU companies will most likely shift their risks on to their co-contractors, demanding as a new standard for the appropriate documents to be transmitted and for the appropriate behaviors to be enforced. Failing to comply will result in a breach of contract and liability.
As obligations, and therefore risks, regarding ESG and sustainability matters will arise in the next years, our next newsletter will be about the different types of risks.
Jacques Perotto, Partner and Maxime Hermes, Counsel