The CSDDD is approved: present and future of the new directive

The 'compromise' solution proposed by Belgium centralizes the burden on large companies. According to a note from Palazzo Chigi (the Italian government headquarters), this approach assumes that large companies are "better able to monitor their supply chains and contribute to the mitigation of the effects of economic activities on climate change." However, recent court cases involving two prominent Italian fashion houses raise questions about this assumption. Both companies were placed under judicial administration for not adequately overseeing their subcontractors, leading to charges of illegal intermediation and labor exploitation under Article 603-bis of the Italian Criminal Code, commonly known as 'caporalato'. This suggests that large companies might still struggle to supervise their supply chains effectively.

The new CSDDD text eliminates the original proposal's distinction between sectors, where 'high-risk' sectors had lower size thresholds. It also introduces a staggered implementation timeline based on company size, giving businesses more time to comply with the directive's requirements.

The significance of the CSDDD lies in its codification of the UN Guiding Principles on Business and Human Rights into EU law, obliging companies to conduct environmental and human rights due diligence throughout their value chains. Given this importance, the speed and effectiveness of its implementation are crucial.

The CSDDD is now in its final stages. Following the European Parliament's approval, the final text must be formally adopted by the EU Council in May before being published in the Official Journal and entering into force 20 days later. This timeline suggests that, by June, the directive will be officially adopted, starting the process of transposition and implementation at the national level.

After several unsuccessful attempts to reach an agreement in recent weeks, the final approved version of the Corporate Sustainability Due Diligence Directive significantly reduces its operational scope. The new rules apply to companies operating in the European Union with more than 1,000 employees and a worldwide net turnover exceeding EUR 450 million. This is a substantial reduction compared to the threshold agreed upon by the European Parliament and Council in December 2023, which covered large EU companies with more than 500 employees and a worldwide net turnover of at least EUR 150 million.

As a result, fewer companies within and outside the EU will be subject to the directive's requirements. Additionally, the original proposal's differentiated approach for high-risk sectors —where smaller companies with over 250 employees and a turnover of more than EUR 40 million were also included — has been temporarily set aside.

France's initial proposal for a limit of 5,000 employees would have excluded around 80 per cent of companies, suggesting that the final compromise is more feasible. However, this reduction in scope raises concerns about the directive's urgency, especially given the increasing frequency of news stories about environmental and human rights issues.

While these changes may reduce the scope of the CSDDD, they don't entirely negate its effectiveness. Despite the aforementioned legal cases, which could indicate isolated failings by large companies, the remodeling of contractual relations with an ESG focus could indirectly impact smaller companies that serve larger industry players. In many European countries, including Italy, small and medium-sized enterprises form the backbone of supply chains for major companies. Thus, the effectiveness of the CSDDD's new text cannot be entirely dismissed, even with its reduced scope.

The agreed compromise for the Corporate Sustainability Due Diligence Directive involves a phased implementation. Companies with over 5,000 employees and a turnover of at least EUR 1.5 billion must comply within three years. Those with over 3,000 employees and a turnover of at least EUR 900 million have four years to comply. Finally, companies with more than 1,000 employees and a turnover of at least EUR 450 million must meet the directive's requirements within five years.

This gradual approach is a significant compromise, as it allows many companies a longer adjustment period. However, it also means that many businesses will only be affected by the CSDDD toward the end of the decade, potentially delaying the directive's intended impact on environmental and human rights due diligence.

Changes have also been made to the civil liability clause, providing Member States with more flexibility. To ensure that victims of negative impacts have effective access to justice and compensation, Member States must establish internal rules that do not undermine the protections established by the 2004 Environmental Liability Directive. These adjustments give individual countries greater leeway in implementing the Corporate Sustainability Due Diligence Directive, while still preserving the essential legal framework for environmental responsibility and liability.

The agreement likely came about to win over France and Italy, both of which have considerable voting power in the EU Council due to their population. Without their support, the Corporate Sustainability Due Diligence Directive would not have passed. Although there was resistance to the directive, the final consensus included some reluctant countries, but this came at a cost: the initial ambitions of the directive were reduced.

As a result, the directive will only apply to the largest companies, excluding almost 70 per cent of those originally covered in the earlier draft. With the approval by the Committee of Permanent Representatives (COREPER), the long journey towards CSDDD approval has concluded. However, after multiple postponements and rejections, the price of agreement was clear: a significant dilution of the directive's scope and ambition.​​