European Commission adopts first FAQs on the CSDDD

Background

To mark the entry into force of the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) on 25 July 2024 (see our previous blog post), the European Commission published initial guidance on the Directive in the form of Frequently Asked Questions (FAQs) on a dedicated webpage. 

The same approach has been adopted for EU due diligence sectoral regimes, such as the EU Deforestation Regulation (see dedicated webpage and FAQs) or the EU Conflict Minerals Regulation (see dedicated webpage and FAQs).

EU Member States will have to transpose the CSDDD into national law within two years, i.e. by 26 July 2026. The CSDDD rules will then start to apply one year later, as from 26 July 2027 (see below). 

In addition to the EU Member States’ transposition measures, the European Commission will have to adopt delegated measures, in particular adopting by 26 January 2027 (or 26 July 2027, depending on the measures) model contractual clauses and various guidelines to support compliance in practice. The published FAQs are part of these measures. 

Content of the FAQs

These first FAQs are not yet comprehensive guidelines. Rather, they essentially provide a high-level summary of the content of the CSDDD, as well as some further background on the reasons for its adoption and the expected impacts of its entry into force. The FAQs are divided into nine sections, whose main takeaways are summarised below.

General overview

The FAQs begin with a very short overview of the aim of the CSDDD and the due diligence duties it imposes on companies. We have summarised this in more detail in our own previous FAQs.

Objectives

According to the Commission, the need for legislative intervention in this area stems from three main reasons:

• international voluntary frameworks would not be sufficient to ensure companies sufficiently integrate sustainability aspects into their operations, especially beyond the first link of their supply chains;
• Member States’ due diligence laws (see our previous client alerts on the French Loi Vigilance and the German LkSG) would entail legal uncertainty, contributing to the need for harmonised EU legislation to avoid fragmentation of the Union market; and
• integrating sustainability into business operations and value chains would improve risk management, resilience, innovativeness, and competitiveness of EU businesses.

Entry into force / Application

The Commission also stresses that the CSDDD aligns to a large extent with existing international standards on corporate sustainability due diligence – such as the 2011 United Nations Guiding Principles on Business and Human Rights, the 2022 ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, and the 2023 OECD Guidelines for Multinational Enterprises – though “with certain necessary adaptions linked to its mandatory nature.”

Member states will have until 26 July 2026 to transpose the CSDDD into their national laws. 

The CSDDD will apply on a phased basis for in-scope companies:

The Commission also confirms that the CSDDD should be treated as the lex generalis. In other words, more specific obligations in other sector laws (see our previous blog posts on, e.g., the Conflicts Minerals Regulation, the Deforestation Regulation, the Batteries Regulation, and the Forced Labour Ban Regulation) shall prevail in case of conflict.

Personal scope and financial services

The Commission expects around 6,000 EU companies and 900 non-EU companies to be in-scope. No list has been published yet.  

Regarding financial undertakings, the Commission confirms that they fall under the personal scope of application of the CSDDD (and must adopt a climate transition plan), but that “financial services provided in the context of relationships with clients” are excluded from the material scope of the due diligence obligations.

For SMEs, the Commission stresses that, if they do not fall under the scope of the CSDDD, they may be indirectly impacted as business partners in the chains of activities of in-scope companies. This explains why the CSDDD includes both provisions aimed at supporting them and safeguards against shifting compliance burdens by in-scope companies.

Material scope

Adverse human rights and environmental impacts tackled by the CSDDD refer to adverse impacts on protected persons or the environment resulting from the violation of multilateral conventions listed in the Annex to the CSDDD. According to the Commission, only environmental conventions which “could be implemented directly by companies without the need for additional measures by Member States” were selected. In practice, we expect debates on such “implementation” to be challenging for a number of instruments.

In addition, the Commission addresses “measurable environmental degradation” as referred to in the Annex. It confirms that it includes harmful soil change, water or air pollution, excessive water use, and land degradation, which can impair human rights and ecosystem services that are vital to human wellbeing. These impacts can harm health, safety, and livelihoods by, for example, contaminating drinking water or disrupting food security. Ecosystem services include benefits like food provision, crop pollination, clean air and water, waste decomposition, and climate regulation.

Content of obligations

This section reiterates the key point that the CSDDD follows a risk-based approach, with companies being allowed to prioritise their actions and having to adopt appropriate measures to prevent, mitigate and bring to an end adverse impacts. These include practical measures, such as putting in place prevention and corrective action plans for complex issues, seeking contractual assurances from direct business partners with cascading clauses through the chain of activities, adapting business plans, strategies and operations, etc. 

The requirement of prioritising engagement with business partners, rather than disengagement, is also stressed. The latter is only required in case of “severe impacts and only as a “last resort” measure when all other measures have failed”. Before disengaging, the company should assess if the negative consequences of disengagement are likely to be significantly more severe than the adverse impacts aimed to be addressed. If the company decides to disengage, it must take steps to prevent or mitigate adverse effects and give reasonable notice to the business partner before ending the relationship.

The Commission confirms that administrative sanctions are not limited to breaches of due diligence obligations, but may also be imposed “if a company fails to adopt a transition plan with the required content, or to update the plan, including the actions to reach the targets.” 

Enforcement

The FAQs summarise the two limbs of the enforcement regime, namely the supervisory authorities to be established by each Member States (coordinated by a European Network of Supervisory Authorities) and the civil liability regime before Member States’ courts. 

The possibility of enforcement against third-country companies is stressed, as well as the fact that non-compliance with the CSDDD’s obligations may be taken into account as part of the award criteria for public and concession contracts.

Burden limitation and safeguards

The Commission sets out the above-mentioned delegated measures it will have to adopt, stressing the objective to reduce the burden for companies (in the wake of heated political debates in this respect in the context of the recent EU elections and the upcoming entry into application of the EU Deforestation Regulation). This will include guidance on fitness criteria for industry schemes, multi-stakeholder initiatives, the use of digital tools and technologies. and third-party verifiers. 

The Commission will also have to adopt model contractual clauses and establish a “single helpdesk” through which companies may seek information, guidance, and support; and the European Network of Supervisory Authorities. 

In addition, the Commission stresses that no new reporting requirements are created for companies already reporting under the Corporate Sustainability Reporting Directive (CSRD).

Impacts of the Directive

According to the Commission, individuals would benefit from better human rights protection, involvement in corporate decision-making, and more avenues to hold companies accountable through complaints processes. Additionally, they would gain improved access to remedies for human rights and environmental abuses, and contribute to a healthier environment, including climate change mitigation.

Still, according to the Commission, companies in the EU market would benefit from a harmonised legal framework, increased customer trust, employee commitment, and awareness of negative human rights and environmental impacts, as well as improved risk management, resilience, innovation, and competitiveness.

The Commission calls for the “amplification” of these benefits through coordination with third countries, including by “strengthening the rules and enforcement framework regarding human rights and environmental protection in third countries, the development of sustainability standards, support for multi-stakeholder alliances and industry coalitions, or accompanying support provided through EU development policy and other international cooperation instruments”.

Further resources

For more information on the CSDDD, see our related content:

• Watch our webinar: Deal on the EU CSDDD 
• Read our FAQs on the upcoming EU Corporate Sustainability Due Diligence Directive 
• View our flyer on managing supply chain risks: reporting and diligence 
• Watch our video on human rights due diligence: prioritisation and where to start 
• See our Business & Human Rights webpage 
• Read our BHR blog posts

If you would like to discuss any aspect of the new regime, please reach out to the contacts on this post, or to your usual Linklaters contact.