EU Strikes Political Accord on New Corporate Sustainability Regulations Affecting US Firms

On December 14, 2023, the EU introduced the Corporate Sustainability Due Diligence Directive (CSDDD), designed to mandate human rights and environmental obligations for EU and non-EU companies. This law, unlike previous voluntary guidelines from the OECD and UN, will require companies to align their business model with a 1.5 °C global warming limit. Damages and penalties for noncompliance – including up to 5% of a company’s global turnover – are also introduced.

Below are some key highlights of the provisional agreement:

Who does the CSDDD apply to?

The new rules apply to:

• EU companies with over 500 employees and a net global turnover exceeding 150 million euros or those in high-impact sectors with over 250 employees and a global turnover of 40 million euros.
• Non-EU companies meeting certain EU turnover thresholds, with specific EU presence requirements still under review.

The financial services industry, after much debate, will be temporarily exempt from CSDDD’s due diligence obligations but must still adopt a climate transition plan. Despite inapplicability, many businesses can anticipate indirect impact via information requests, contractual assurances, and audits to verify compliance.

Key Features of the CSDDD

Due Diligence Obligations

The CSDDD demands in-scope companies identify and mitigate potential human rights and environmental impacts. This involves integrating due diligence into their policies, identifying impacts in their operations, preventing potential impacts, remedying realized adverse impacts, establishing a notification system and complaints procedure, monitoring due diligence effectiveness, and publicly declaring their procedures.

Mandatory Climate Transition Plan

The CSDDD mandates companies to adopt a climate transition plan to ensure business alignment with 1.5 °C global warming limit. Impacts on director remuneration and the applicability to non-EU companies operating in the EU are still unclear.

Value Chain Considerations

The CSDDD applies to a company’s operations, subsidiaries, and their business partners. Companies are expected to engage and effect change throughout their value chains, even disengaging if impacts can’t be prevented.

Enforcement Measures

Fines

Companies failing to comply risk sanctions from national administrative authorities, including fines up to 5% of their global turnover.

Civil Liability Regime

The CSDDD introduces a civil liability regime, where noncompliance resulting in harm could lead to damages claims from concerned parties within a five-year period.

Exclusion from Public Tenders

Public contracts and concessions could also consider CSDDD compliance as a criterion for award.

What’s Next?

The provisional agreement awaits approval from the European Parliament and European Council, with the lawmaking process expected to complete by Q2 2024. The new requirements are set to roll out between Q1 and Q2 2026.

These rules form part of the EU’s efforts to encourage sustainable international business. For more information on recent sustainability developments, visit our publications on the Corporate Sustainability Reporting Directive, the new Deforestation Regulation and the EU’s forced labour product ban proposal.

For support and understanding regarding the implications of this new regime, please reach out to Cooley’s ESG & sustainability advisory team.