Directive 2024/1760, also known as the Corporate Sustainability Due Diligence Directive (CSDD), entered into force on 25 July 2024. Member States are required to implement its provisions into national law within the next two years. The CSDD is a key piece of European Union legislation aimed at strengthening the responsibility of businesses for their environmental, human rights, and social impacts.
The main goal of the CSDD is to strengthen corporate responsibility by encouraging businesses to manage their operations more responsibly, taking into account environmental, social, and human rights aspects. Consequently, it also promotes sustainable development through the implementation of sustainable management strategies. The CSDD explicitly requires businesses to report on their due diligence activities and their environmental and social impacts. Effective implementation of these guidelines will also enable the identification and mitigation of the risk of human rights violations and environmental degradation resulting from the activities of these entities. Another important tool introduced by the CSDD is the obligation to establish mechanisms for filing complaints by individuals and entities affected by the negative impacts of business activities. This will undoubtedly increase the responsibility and accountability of companies for the negative impacts of their activities. Furthermore, both the European Commission and the Member States plan to introduce a number of measures to support the implementation of the CSDD and to appoint appropriate supervisory authorities, which will be authorized to conduct inspections and conduct investigations, among other tasks.
The CSDD covers both EU and non-EU companies. Article 2 of the aforementioned act specifies groups of entities established under national law that will be subject to EU regulation. The first category comprises companies that, in the most recent financial year for which annual financial statements were or should have been prepared, employed an average of more than 1,000 employees and had worldwide net sales exceeding EUR 450 million. The next category comprises companies that did not meet the thresholds indicated above but were the ultimate parent company in a group that met these thresholds, as well as companies that have entered into, or are the ultimate parent company of, a group that has entered into franchise or licensing agreements with independent external companies in the EU in exchange for royalties exceeding EUR 22.5 million, provided that these agreements ensure a common identity, a common business concept, and the use of uniform business methods. For companies outside the European Union, the number of employees is irrelevant for the purpose of coverage, as this is solely related to net turnover generated within the EU and applies to parent companies, franchise agreements, and licensing agreements. It should also be emphasized that although the CSDD does not directly address small and medium-sized enterprises, its implementation in other sectors will undoubtedly have a significant impact on this group of entities as well.
Due to the implementation of the EU directive, companies will be required to adapt their operational processes accordingly. Importantly, they will be held liable for any negative consequences and, in certain situations, will be subject to financial penalties for violating the obligations stipulated in the directive. The benefits arising from this are significant, however, as they contribute to improving the reputation of companies, increasing customer trust, and may also impact company finances through more sustainable resource management. The CSDD therefore represents a key step towards increasing corporate accountability and promoting a more sustainable and responsible approach to corporate management throughout the European Union.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of July 31, 2024
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