Navigating the New EU Sustainability Reporting and Due Diligence Regulations

By GAIL Europe Regional Board

Navigating the New EU Sustainability Reporting and Due Diligence Regulations

Part 2: Global Due Diligence Obligations under the EU Sustainability Framework

Introduction
In our first update, we introduced the EU Financial Finance Framework, a major EU regulatory framework which is part of the broader European Green Deal aimed at achieving climate neutrality by 2050.

Our first piece focussed on the Corporate Sustainability Reporting Directive (CSRD), as well as a snapshot of the Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR), with the CSRD being a major piece in the EU ESG jigsaw as it obliges a wide range of EU and international companies to report according to a closely knitted net of Environmental, Social and Governance (ESG) factors. For more details please visit The EU Sustainability Regulatory Framework – Finding your Way Through the Maze.

Unlike these previous regulations within the EU’s Sustainable Finance Framework, the Corporate Sustainability Due Diligence Directive (CSDDD) focuses on ensuring that both certain EU and non-EU companies take appropriate action toward human rights and environment-related matters.

This article outlines the key obligations under the CSDDD, including compliance timelines, due diligence obligations and their broader implications for companies. Please note that there are also various sector-specific EU sustainability due diligence obligations, which we will not go into in this article.

Scope and Start of Obligations

The CSDDD, which came into force in July 2024, mandates that companies take responsibility for identifying, preventing, and mitigating adverse environmental and human rights impacts within their operations and great parts of their supply chains (in particular upstream, but also downstream). Companies must implement climate transition plans to align with the EU’s climate goals.

The application of the CSDDD follows a phased approach based on company size and turnover:

  • July 2027: Applies to companies with over 5,000 employees and €1.5 billion in annual turnover (with non-EU companies having to comply by then too if they make this turnover in the EU, with no employee threshold applying).
  • July 2028: Expands to companies with more than 3,000 employees and €900 million in turnover (with non-EU companies having to comply by then too if they make this turnover in the EU, with no employee threshold applying).
  • July 2029: Extends to firms employing over 1,000 workers with a €450 million turnover. (with non-EU companies having to comply by then too if they make this turnover in the EU, with no employee threshold applying). Certain franchise and licensing arrangements entered into by both EU and non-EU companies are covered by then too.

Summary of Obligations under the CSDDD

Key obligations under the CSDDD include:

  1. Due Diligence Policies: Companies must integrate sustainability considerations into their policies, detailing how they will address human rights and environmental risks within their operations, subsidiaries, and great parts of their supply chains.
  2. Risk Identification and Assessment: Regular assessment of actual and potential risks to human rights and the environment, ensuring that impacts linked to the company’s own operations, their subsidiaries’ operations as well as their business partners’ chain of activities are identified.
  3. Mitigation and Prevention Measures: Companies are required to implement measures to prevent and/or mitigate identified risks, such as changing internal practices, engaging with suppliers, or adjusting procurement methods if needed.
  4. Monitoring Effectiveness: Continuous monitoring and updating of policies to ensure the effectiveness of due diligence measures.
  5. Climate Transition Plans: In-scope companies must establish climate transition plans, setting targets for reducing greenhouse gas emissions (Scope 1, 2, and 3) in alignment with EU goals for 2030 and beyond.
  6. Stakeholder and Value Chain Engagement: Businesses must engage with affected stakeholders and establish grievance mechanisms for individuals or communities adversely impacted by their operations.
  7. Reporting Obligations: Companies must publicly disclose their identified risks, the measures they’ve implemented, and their effectiveness through annual sustainability reports. Exemptions apply to those companies that report under the CSRD.

Non-compliance may lead to penalties, including fines of at least 5% of annual turnover as maximum fine to be stipulated by the EU Member States that will have to implement the CSDDD into their national laws by July 2026. Additionally, companies may face civil liability for failing to meet their due diligence obligations.

Indirect Impacts on Value Chains

Even companies not directly subject to the CSDDD may experience its effects. In-scope companies are expected to ensure compliance within their great parts of their value chain, indirectly requiring suppliers and partners to adhere to these standards. This could create a ripple effect, pushing smaller companies to align with the CSDDD even if they are not explicitly covered.

Conclusion

While the CSDDD has just been settled, it may well be open for re-negotiation again soon: on 20 November, the Commission announced that it envisages to re-open and merge the CSDDD with the CSRD and Taxonomy under a process called “omnibus legislation”. Such a re-opening of the CSDD could have a wide-ranging impact on its future scope and extent (as well as those of the CSRD and Taxonomy).

The CSDDD represents a major change in corporate governance in Europe, placing a greater emphasis on long-term environmental and social impacts. Compliance deadlines vary based on company size and turnover, with the first group required to comply by July 2027. Companies, whether directly or indirectly in scope, should therefore begin early planning to meet these obligations, ensuring they integrate due diligence into their corporate strategies. Preparing now will be key to minimizing risks and seizing opportunities in a more sustainable business environment.

Outlook

Watch this space for future articles, where we will draw conclusions from the EU Sustainable Finance Framework and how it impacts on companies in other parts of the world, including the Global South and further consider the impact of EU Deforestation Regulation.