EU finalizes corporate sustainability, human rights due diligence directive 

July 09, 2024

Companies in the European Union (EU) and European Economic Area with significant sales and more than 1,000 employees will have to identify, prevent, mitigate and remediate actual and potential adverse impacts on people and the environment, and implement a Paris-aligned climate transition plan, under measures included in the corporate sustainability due diligence directive (CSDDD) published in the EU’s Official Journal on July 5, 2024. The CSDDD takes effect on July 25, 2024, and member states will have until July 26, 2026, to transpose the directive into national law. Compliance will be phased in over a period of three to five years.

The European Commission will issue guidelines on best practices, and risk assessment and information sources will be issued within 30 months of the CSDDD’s effective date (and six months before the measures take effect for the largest companies in scope).

The CSDDD complements other EU initiatives on sustainability and human rights obligations, such as the forced labor regulation and the corporate sustainability reporting directive (CSRD).

• Compliance with the CSDDD will be phased in over a three- to five-year period after July 25, 2024. Compliance will be required as follows: July 26, 2027, for companies with more than 5,000 employees on average in the last financial year and a global net turnover exceeding €1.5 billion; July 26, 2028, for companies with more than 3,000 employees and a global net turnover exceeding €900 million; and July 26, 2029, for companies with more than 1,000 employees and a global net turnover exceeding €450 million. Companies with 1,000 or fewer employees and a global net turnover of €450 million or less are not subject to the CSDDD.
• Certain companies headquartered outside of the EU will also be in the CSDDD’s scope. Companies with turnover “generated in the EU” that exceeds €1.5 billion must comply from July 26, 2027; those with €900 million must comply from July 26, 2028; and those with €450 million must comply from July 26, 2029. 
• For groups, the ultimate parent company will be responsible for compliance if the group passes the relevant thresholds when viewed on a consolidated basis.
• Companies subject to franchising or licensing agreements in the EU will be in scope of the CSDDD if they meet minimum royalty and turnover thresholds.
• Regulated financial institutions in the CSDDD’s scope will only have to conduct due diligence — at least initially — on their upstream business partners. The commission must report within two years if additional requirements should be introduced on the provision of financial services and investment activities by financial institutions.
• The human rights that will be subject to due diligence are listed in the directive’s annex and include the International Labour Organization’s core/fundamental conventions. Human rights that impact employment include the prohibition of the worst forms of child labor, forced or compulsory forced labor and all forms of slavery and slave trade; the payment of a fair wage and adequate living wage; the right to freedom of association, and to organize and conduct collective bargaining; the right to enjoy reasonable and favorable conditions of work; the prohibition on employing children younger than the age for completion of compulsory schooling; and the prohibition of unequal treatment in employment.
• Companies must have effective risk-based due diligence policies to identify, assess, prevent, mitigate and terminate actual and potential human rights and environmental harms in their own operations, their subsidiaries and business partners in their “chain of activities.” They must bring adverse impacts to an end (this could include termination of the business relationship); remediate actual adverse impacts; conduct meaningful stakeholder engagement; establish and maintain a notification mechanism and complaints procedure; and adopt and implement a transition plan to mitigate climate change.
• Companies must monitor at least annually the effectiveness of their policy and measures and publish an annual statement on their website. Companies that are also subject to reporting requirements under the CSRD do not have to produce a separate report.
• Companies will be held liable for damages for intentional or negligent noncompliance in certain situations, and could be held jointly and severally liable where they and their business partners jointly cause an adverse impact. Member states must allow trade unions, nongovernmental organizations, or human rights institutions to bring civil liability actions to enforce victims’ rights.
• Member states must designate a supervisory authority to monitor compliance and ensure that financial sanctions are at least 5% of the company’s net worldwide turnover in the previous financial year. 
• The commission will issue guidance on due diligence duties for different industry sectors and specific adverse impacts and voluntary model contractual clauses, and will establish a portal to advise companies on meeting their due diligence obligations.

• Directive2024/1760 on corporate sustainability due diligence and amending Directive 2019/1937 and Regulation 2023/2859 (Official Journal of the European Union, July 5, 2024)
• Conventions protocols and recommendations (International Labour Organization) 

Links to any resources on Mercer Link are accessible only to Mercer colleagues. Clients and prospects may contact their consultants for copies or access 2019 and later GRISTs via the Law & Policy Group’s webpage on mercer.com.

• EU requires enhanced corporate sustainability disclosures (Mercer, Jan. 11, 2023)
• EU proposals address human rights and environmental impacts (Mercer, Feb. 25, 2022)