Reed Smith In-depth

Key takeaways

  • Large EU companies (with more than 1,000 employees and a worldwide turnover of more than €450 million) and non-EU companies doing significant business in the EU (with a turnover of more than €450 million in the EU) will be required to identify and address actual or potential adverse human rights and environmental impacts in their supply chains.
  • In-scope companies will be required to perform risk-based due diligence, adopt a climate transition plan and report on their implementation and effectiveness.
  • The Directive also applies to certain companies receiving more than €22.5 million in royalties under franchising or licensing agreements.
  • For groups, the ultimate parent company will be responsible for compliance if the group passes the relevant thresholds when viewed on a consolidated basis.
  • Obligations will come into force over a period of three to five years starting from 2027, depending on the size of the company, beginning with the largest.
  • In-scope companies could be civilly liable for negligently or intentionally causing damage by breaching their due diligence obligations.
  • Penalties include maximum fines of at least 5% of the company's net worldwide turnover in its previous financial year.

Latest developments

On 24 May 2024, the EU Council gave its final stamp of approval to the text of the Corporate Sustainability Due Diligence Directive (the Directive) after a tumultuous journey through the EU legislative process. The Directive is the result of nearly two years of negotiations and compromises between the EU institutions and the member states, and reflects the EU's commitment to pushing forward with sustainable development and human rights measures, despite growing internal backlash against some aspects of its Green Deal programme. The Directive is now expected to come into force in the coming weeks.

Main purpose of the Directive

The Directive obliges large EU and non-EU companies and groups of companies to identify, prevent, end or mitigate adverse environmental and human rights impacts that arise either from their own operations or those of their subsidiaries and, where related to their ‘chains of activities’, those of certain upstream and downstream business partners.

It will oblige in-scope companies to:

  1. undertake risk-based due diligence and to report on it at regular intervals;
  2. integrate environmental and human rights due diligence into their policies and risk management systems;
  3. identify and assess actual or potential adverse human rights and environmental impacts, prioritise the most severe or likely ones, and when actual adverse impacts are identified, end or minimise them and provide remediation;
  4. engage in a meaningful way with stakeholders, and to the extent not already in place, adopt a complaints notification mechanism and complaints handling procedure;
  5. monitor the effectiveness of their due diligence policy and measures;
  6. publicly communicate on due diligence; and
  7. create a climate transition plan.