Corporate Sustainability Due Diligence Directive (CSDDD): The Supply Chain Law Explained

The Corporate Sustainability Due Diligence Directive (CSDDD) is an European-wide directive to make companies responsible for misconduct in their full supply chain. In December 2023, the European Parliament and the Council of the EU reached an agreement to be voted on in March 2024.

But, in the ever-fluctuating environment that politics is these days, the scope was heavily narrowed down and the text adopted on March 15th was only a fraction of the text previously agreed upon.

So what happened?

In this blog, we’re zooming in on what the Corporate Sustainability Due Diligence Directive is, how it came to be, what the effects will be for small businesses that are already heavily committed to sustainability and much more.

Let’s dive in!

CSDDD: Why was the Corporate Sustainability Due Diligence Directive initiated? 

The Corporate Sustainability Due Diligence Directive (CSDDD), also referred to as CS3D, was initiated to create a level playing field for companies selling their products or services on the European market and is meant to establish and formalise the European Union’s position as a leader in human and environmental rights.

The CSDDD requires companies to proactively reduce the negative impact of their activities on human rights and the environment. The directive provides a due diligence framework. Unique about CSDDD is that it not only applies to the company itself but also to its subsidiaries and supply chain. It would make corporates reliable for misconduct in their full supply chain.

The political turmoil around CSDDD: How fake news led to the postponement of the EU Council’s vote

For the CSDDD to come into play, the European Union’s Member States (the European Council) and the European Parliament need to agree on a final version of the directive. Even though the two reached an informal agreement on an extensive version of the CSDDD in December 2023, Germany announced it would abstain from voting in favour only three days before the European Council was scheduled to vote.

The move was motivated by German minority partner Freie Demokratische Partei (FDP), which is currently polling at only 4% of popular support in Germany.The FDP was spreading  impactsSDDD would have on small businesses, despite companies expecting “rather positive” long-term financial impacts from the CSDDD.

As Germany’s move led to other countries pulling back their support, the vote was postponed to the end of February.

Then, in a last-minute U-turn, France demanded a significant decrease in the scope of the directive only a few days before the postponed vote: an increase in the employee threshold from 500 to 5000 employees. This amendment would mean that 80% of the original companies targeted would fall out of scope.

Even though after reaching an agreement, normally the voting stage does not lead to major changes, for CSDDD this last stage turned out extremely volatile and saw significant changes to its scope.

When will the CSDDD come into effect? 

In March 2024, the EU Council (= the Member States) approved a slimmed-down version of the CSDDD agreed upon in December 2023. A vote on this final text by the European Parliament is expected to be scheduled end of April 2024. Once approved, member states have at least two years to implement the CSDDD into their national legislation.

What’s in scope for CSDDD and who does it apply to?

In the version agreed upon by Member States, CSDDD will apply to all companies operating on the European market if:

  • Companies based in the European Union are in scope if they have more than 1000 employees and a turnover of over 450 million euros.
  • Companies outside of the EU, but selling on the European market are in scope if their turnover generated in the EU is above 450 million euros.

Differences between the CSDDD agreed upon in December 2023 and the version that was approved on March 15th

As said, the version of the CSDDD that Member States voted in favour of, is a watered down version of the initial document agreed upon. The biggest changes between the preliminary agreed on document and the version of CSDDD that was accepted by the European Council are:

  1. The employee threshold for companies based in the EU went up from 500 to 1000
  2. The revenue threshold went up from 150 million euro to 450 million euro annually.
  3. High-risk industries no longer have a lower employee threshold and are only in scope if they meet the 1000 employees and the 450 million euro turnover thresholds.
  4. The phase-in periods have changed, meaning that the earliest compliance deadlines will begin in 2027 for companies with 5000+ employees and an annual turnover of 1500 million euros.
  5. The requirement to implement climate transition plans through financial incentives was removed.

The Effects of CSDDD for small businesses: what actions should you take?

The CS3D will apply to roughly 5000 companies. Given that companies under scope are liable for misconduct throughout their supply chain, it may be the case that you’ll need to adhere to the due diligence framework provided by CSDDD too. However, as the final vote yet needs to be taken, for now you’re doing well by mapping your business partners and seeing if any of them meet the thresholds of the CSDDD.

Written by
Melissa Wijngaarden