On 24 April 2024, the Corporate Sustainability Due Diligence Directive (CSDDD1 ) was adopted by the European Parliament, following its agreement with the European Council. The Directive introduces due diligence obligations for the largest companies operating in the European Union regarding human rights and environment protection.

In this issue of our ESG Newsletter, we discuss the content of the Directive and its crucial consequences that may potentially affect ESG strategies in Polish companies.

1. Legislative process: what has already been agreed

The European Parliament adopted the CSDDD, however, the support for this Directive was significantly lower than for the already adopted CSRD2.

This clearly shows that the CSDDD provisions are controversial. Currently, the Directive still has to be passed by the European Council in order to enter into force. However, since the content of the Directive adopted by the European Parliament has already been negotiated and consulted with the European Council, the next legislative stage seems to be a formality. For the Directive to become legally binding in Poland, it must be transposed into the Polish legal system. Currently, there is no specific information as to when this could take place.

1 Proposal for a Directive of the European Parliament and of the Council on corporate sustainability due diligence and amending Directive (EU) 2019/1937 – letter of 15 March 2024 from the Permanent Representatives Committee to the Chair of the JURI Committee containing the agreed text of the draft Directive. This text was voted on by the EP – LINK (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CONSIL:ST_6145_2024_INIT)

2374 votes in favour of the CSDDD, 235 against and 19 abstentions compared to 562 votes in favour of the CSRD, 60 against and 28 abstentions.

2. Main assumptions of the CSDDD

The CSDDD imposes requirements on companies regarding actual and potential adverse impacts on human rights and the environment in relation to their own operations, the operations of their subsidiaries and the operations of their business partners in the company’s chain of activity. It also establishes liability rules for breaches of the said requirements and requires companies to adopt and implement a transformation plan to mitigate climate change. It aims to shift the companies’ strategy and business models towards sustainable development to comply with the 1.5oC target set to limit global warming.

 

3. Entities subject to the CSDDD requirements

As currently intended, the Directive will ultimately apply to companies that are established in accordance with the legislation of individual member states and that meet one of the following conditions:

The Directive introduces a transitional period during which the initial thresholds to fall under the CSDDD will be significantly higher, allowing for the gradual achievement of the Directive’s intended target.

Therefore, the thresholds will be as follows (assuming the Directive enters into force in 2024):

    • as of 2027 for companies employing more than 5,000 employees and achieving turnover exceeding EUR 1,500 million;
    • as of 2028 for companies employing more than 3,000 employees and achieving turnover exceeding EUR 900 million;
    • as of 2029 the target thresholds will start to apply, i.e. 1,000 employees and turnover exceeding EUR 450 million. As of that year, the rules will also apply to entities operating under franchise or licence agreements as indicated in item 3 above.

This means that the new regulations will initially be tested on the largest companies operating in the European Union, and after a two-year test period, big companies will also be included. Currently, there is no information that similar solutions will be imposed on SMEs. It is also worth mentioning that the thresholds have been intensely discussed among EU bodies and member states and the agreed threshold is significantly higher than that originally planned by the European Commission.

33 Entities which have entered into, or are an ultimate parent company of a group which has entered into, franchise or licence agreements in the European Union in exchange for licence fees with independent third-party companies, where these agreements ensure a common identity, common business concept and application of uniform business methods, and where these licence fees amount to more than EUR 22 million in the last financial year for which annual financial statements have been or should have been adopted, provided that the company was or is an ultimate parent company of a group whose worldwide net turnover in the last financial year for which annual financial statements have been or should have been drawn up exceeded EUR 80 million.

 

4. What does the CSDDD protect?

The Directive aims to ensure protection against adverse impacts of businesses on two areas: human rights and the environment. Under the Directive, the adverse impact on human rights is understood as the abuse of one of the rights listed in Part One of Annex 1 to the CSDDD. These are the enumerated human and environmental rights recognised by the European Union as the essential ones, and belong to the following groups:

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  1. fundamental human rights: including the right to life, the prohibition of torture, the right to personal liberty, the prohibition of interference with privacy and freedom of thought and conscience;
  2. social rights: including the right to just and favourable working conditions and an income which ensures a decent living;
  3. children’s rights: including the right to the protection of the child’s health, the protection of the child from exploitation, the prohibition of the sexual exploitation of children, and the prohibition of forced labour, especially slavery;
  4. union rights: including the workers’ right to associate, organise into trade unions, and the prohibition of unequal treatment in the workplace;
  5. environmental protection laws: including the prohibition on causing any tangible soil degradation and the prohibition on unlawfully evicting groups, individuals or communities from their land or resources.

Given its scope of application and object of protection, the CSDDD introduces new standards when it comes to the protection of human rights and the environment.

 

5. Obligations under the CSDDD

A key obligation under the CSDDD is to exercise due diligence regarding human rights and environmental protection, and this should be done on a risk basis. This means that companies should analyse the risks involved on a case-by-case basis and then take them into account in their activities. The scope of areas in which due diligence must be exercised is defined in Articles 5-11 of the Directive, and is presented in the table.

Article 5

Companies should integrate due diligence into their respective policies and risk management systems and have in place a due diligence policy that ensures due diligence on a risk basis.

Article 6

Obliged entities should take appropriate measures to identify and assess actual and potential adverse impacts arising from their own operations or those of their subsidiaries and, where related to their chains of activity, from their established business relationships. To do this, companies should map their operations and identify the most vulnerable areas of their business.

Article 7

Companies take appropriate measures to prevent potential adverse impacts that have been, or should have been, identified pursuant to Article 6 of the Directive. Where prevention is not possible or not immediately possible, appropriate measures should be taken to effectively mitigate these impacts.

Article 8

Companies are required to take appropriate measures to bring actual adverse impacts that have been identified pursuant to the said provisions to an end.

Article 9

Companies should provide the possibility for persons and organisations affected by or related to the violations to submit complaints to them where they have legitimate concerns regarding actual or potential adverse human rights impacts and adverse environmental impacts with respect to the companies’ own operations, the operations of their subsidiaries and their value of activity.

Article 10

Companies should carry out periodic assessments of their own operations, those of their subsidiaries and the chain of activity, to monitor the effectiveness of the identification, mitigation, minimisation, bringing to an end and prevention of human rights and environmental adverse impacts.

Article 11

Companies are required to publish on their website an annual statement regarding the matters covered by the Directive.

6. Administrative liability for non-compliance with the CSDDD

Member states will be required to introduce administrative penalties for non-compliance with the provisions implementing the CSDDD into national legislation.

The penalty established under national legislation must be effective, proportionate and dissuasive. The decision to impose an administrative penalty will be taken by a supervisory authority to be designated by each member state.

The nature and extent of the penalties are to be determined under national law.

When determining the amount of the penalty, the following should be taken into account: (i) the nature, gravity and duration of the breach, (ii) the consequences of the breach, (iii) the actions taken to address the problems, (iv) any previous breaches of the CSDDD, if any, (v) the remedial measures taken, (vi) the financial benefits or losses avoided due to the breach, and (vii) any other circumstances relevant to the circumstances of the case, including both mitigating and aggravating ones.

The CSDDD distinguishes between two types of penalties for breaching its provisions, however, national legislation may introduce more penalty types.

The main penalty is to be a fine, with the calculation of the fine being based on the company’s total global revenue, with a maximum limit of no less than 5% of the company’s total worldwide net revenue in the financial year preceding the decision to impose a fine.

If a company does not comply with the decision imposing a fine in due time, it may also be required to make a public statement admitting the violation and indicating its nature.

 

7. Civil liability for non-compliance with the CSDDD

Companies may also bear civil liability for non-compliance with the CSDDD if the following conditions are met cumulatively:

biuletyn esg the company intentionally or negligently fails to fulfil the obligations set out in Articles 7 and 8 of the Directive where the right, prohibition or obligation set out in Annex 1 to the Directive is intended to protect a natural or legal person; and

biuletyn esg legal interest of a natural or legal person, protected under national law, has been harmed as a result of the failure referred to in item 1 above.

In addition, a restriction was introduced according to which a company cannot face civil liability if the damage was caused solely by its business partners in its chain of activity4.

If the civil liability arises, the entity entitled to compensation is to be fully compensated for the damage suffered in accordance with the applicable provisions of national law 5.

Member states must set a limitation period for claims of no less than five years that starts running from the time the harmed party learned or could have learned (i) of the company’s action and the fact that it constitutes a violation, (ii) the fact that the violation led to the harm, and (iii) the identity of the wrongdoer.

4The EU legislature excluded civil liability of a company when the damage was caused solely by its business partner in the chain of activity. Such liability arises only if the company itself is responsible for an act or omission arising from an obligation imposed on it under the CSDDD, in particular, the obligation to exercise due diligence in relationships with business partners.

5Such liability could, for example, arise in a situation in which a company fails to take any action to end, as part of its operations, a violation involving the employment of a child in particularly hazardous work, with such a person suffering an injury while performing the work. Under the CSDDD, the company, due to its omission, would be required to fully compensate the child for the injury he or she suffered as a result of the accident, with the amount and extent of compensation being determined by national law.

 

8. Summary

The adoption of the CSDDD by the European Parliament shows that the European Union takes human rights and environmental issues seriously.

The amount of fines to motivate companies to comply with the CSDDD regulations indicates that the green transformation is progressing and will continue to progress, with market participants’ participation in the transformation being enforced with severe administrative fines and the risk of liability under civil law.

At the moment, the prospect of the legislation coming into force is a fairly distant future, however, the direction outlined by the European Union is clear.

If you have any questions regarding the CSDDD or would like to learn more about ESG matters, do not hesitate to contact us.

 

Status as of: 12 June 2024

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Contact

Michał Urbański – Attorney-at-law | Counsel, Real Estate

Aleksander Eggink – Associate, M&A Corporate and Commercial