Due Diligence Directive: what companies need to know

Obligations for businesses

Companies will have to identify and address the potential and actual negative impacts on human rights and the environment in their operations and in relation to their subsidiaries and business partners. They will therefore need to regularly map risks, take preventive measures to avoid any harm to human rights and the environment, and carry out remedial action when damage occurs.

Furthermore, large companies will be required to develop and implement transition plans to mitigate climate change consistent with the objectives of the Paris Agreement and the European Climate Law.

Which companies will be covered by the directive?

The directive will apply to large EU companies with more than 500 employees and an annual turnover exceeding EUR 150 million and, under certain conditions, to companies with more than 250 employees and an annual turnover exceeding EUR 40 million. It also applies to large companies from third countries with an annual turnover of more than EUR 150 million in the EU, and under certain conditions even if they have a turnover of more than EUR 40 million.

Micro, small and medium-sized enterprises (SMEs) are not directly covered but may also be indirectly affected as part of large company chains.

Cost of compliance

To comply with the new obligations, businesses will incur various costs, including the costs of establishing and maintaining mechanisms for risk mapping and management or costs associated with adapting corporate operations and value chains (i.e., activities related to the production of goods or the provision of services, e.g. product development and disposal, and activities in the supplier-customer relationships).

Enforcing the rules

Member states shall designate the authorities to supervise compliance with the rules and impose penalties for breaches.

Companies will be liable for damage caused by failure to comply with the due diligence obligations. The statutory body shall primarily be responsible for ensuring that legal obligations are complied with. A breach of the relevant obligations could therefore also mean a breach of due managerial care, with all the risks it entails. Victims will be entitled to compensation.

Next steps

The directive will enter into force 20 days after its publication in the Official Journal of the EU. Member states will have two years to transpose it into their national laws. Companies should start working as soon as possible to put the right processes in place to be ready for the new requirements.

The CSDDD represents a fundamental change for businesses in terms of sustainability and human rights. We expect it to affect many related regulations in the Czech Republic. We will keep you informed about any further changes.