The European Union’s Corporate Sustainability Due Diligence Directive (CSDDD) was published on July 5, 2024. It must be transposed into national laws by July 26, 2026, and phased in over the coming several years. The national laws adopted under the Directive will ultimately apply to all companies that have annual group-wide net sales in the EU of over €450 million to E.U. companies with annual franchising fees or royalties of at least €22.5 million and net sales above €80 million; and to non-EU companies with those levels of franchising or royalty revenue in the E.U.
Nearly all large U.S. multinational enterprises (“MNEs”) will be subject to these laws because their European subsidiaries exceed the revenue thresholds or because their global sales in and exports to the E.U. exceed €450 million. The largest MNEs will become subject to the laws beginning in 2027.
Because the due diligence review mandated by the Directive extends to in-scope MNEs’ supply chains, distribution channels, and other business partners, the human rights, environmental, and climate change requirements of the Directive will also indirectly impact many smaller companies - including U.S. companies that are not otherwise covered. Many of those companies will, however, be in a position to respond to the due diligence requests of in-scope companies because of their own obligations under the E.U.’s Corporate Sustainability Reporting Directive, which will apply to a much larger number of U.S. companies.
What The Directive Does
The Directive will convert the nonbinding obligations of the UN Guiding Principles Business and Human Rights and the frameworks in the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct and OECD Due Diligence Guidance for Responsible Business Conduct into legal obligations binding on companies that fall within the CSDDD’s scope. Many large MNEs already seek to comply with these instruments.
The Directive will cause the rights articulated in a variety of international agreements, all of which until now have been binding only on state parties, to become legally binding obligations enforceable against in-scope MNEs under the laws of all twenty-seven of the member states of the EU. Those agreements include three international human rights treaties—the International Covenant on Civil and Political Rights (“ICCPR”), the International Covenant on Economic, Social and Cultural Rights (“ICESCR”), and the Convention on the Rights of the Child, the eight fundamental conventions of the International Labour Organization (“ILO”), the core climate change mitigation objective of the Paris Agreement, and eleven environmental conventions. The U.S. has signed but not ratified the ICESCR and the Convention on the Rights of the Child. It has only signed two of the eight ILO conventions. It has signed but not ratified three of the environmental conventions.
These international agreements articulate a lengthy list of rights and obligations. If national authorities and courts in the EU enforce the provisions of the Directive as written, the potential impact will be significant. In-scope companies will be required to:
Ensure their global operations and those of their supply chain comply with international standards in relation to workers’ rights, equal pay, union activities, etc., even when those standards go beyond the requirements of domestic law in the country of employment;
Adopt and implement a transition plan to reduce their global greenhouse gas emissions in line with the Paris Agreement’s objective of limiting the temperature increase to 1.5°C above preindustrial levels and with the EU’s net zero targets to avoid causing any measurable environmental degradation that has any one of a range of adverse effects, anywhere in their global operations; to avoid violating others’ right to freedom of expression or interfering with persons’ privacy and correspondence; and
Ensure that any land or other natural resources to be used by the companies are not taken from and do not result in evictions of persons or communities who thereby lose their ability to subsist or their means of livelihood.
Although called a due diligence directive, if rights violations are identified through the due diligence process, the in-scope MNE will be required to eliminate or, if that is not possible, mitigate them.
The CSDDD raises many critically important questions to which there are no clear answers at present. Among other aspects of the Directive, U.S. MNEs will need to focus on their own compliance and the compliance of their supply chain and other business partners, with at least seven sets of rights and obligations set forth in the Directive.
Conditions of work
Among the rights listed in the Directive is the right to enjoy just and favorable conditions of work, including:
A fair wage and an adequate living wage for employed workers,
A decent living,
Safe and healthy working conditions, and
Reasonable limitation of working hours
Interpreted in line with Articles 7 and 11 of the ICESCR, which clarify that the right to an adequate living wage and a decent living is intended to provide the worker and the worker’s family “an adequate standard of living for himself and his family, including adequate food, clothing, and housing.”
Although over 170 countries have minimum wage laws, and MNEs tend to pay above the going rate in most countries, enforcement of minimum wage laws differs significantly across countries. Categories of workers are often excluded from minimum wage laws, and there is often a significant gap between the minimum wage and a living wage, as the ILO defines that term.
In-scope companies will need to conduct due diligence into these matters, both in their own global operations and supply chains, to determine whether their subsidiaries and key suppliers meet the higher standard. According to data collected by the World Economic Forum, only 24 percent of employers globally currently pay a living wage. The CSDDD will make this obligatory for in-scope companies.
Many countries have laws setting maximum working hours, but enforcement varies, and there are significant exceptions. Similarly, many countries have laws regulating the health and safety of workplaces, but in some countries, there is little enforcement.
It appears that workers in non-EU countries, or an NGO or trade union acting on their behalf, will be able to lodge complaints with EU enforcement authorities or to bring suit in EU courts for a non-EU company’s alleged failure to pay a living wage or limit working hours. While in-scope companies will be required to seek contractual assurances from direct business partners that they will ensure compliance with these requirements as well and verify compliance with those undertakings, it is not clear what an in-scope MNE is supposed to do and what its liability may be, if the counterparty refuses to do so or if the MNE knows that the counterparty is not complying.
Equal Pay And Nondiscrimination
The Directive requires the transposed laws to prohibit unequal treatment in terms of employment unless the requirements of the employment justify this. Unequal treatment includes:
The payment of unequal remuneration for work of equal value and
Discrimination on grounds of national extraction or social origin, race, color, sex, religion, or political opinion.
This right is to be interpreted in accordance with Article 7 of the ICESCR, which requires equal remuneration for work of equal value without distinction of any kind. In particular, women are guaranteed conditions of work that are not inferior to those enjoyed by men, with equal pay for equal work.
Equal pay for equal work and nondiscrimination in employment are established legal principles in the EU, US, and UK and in several other countries. Still, legal protections for women and racial and ethnic minorities in many countries are nonexistent or weak.
Rights To Form Unions And To Strike
The Directive also requires in-scope companies to ensure their workers are entitled to freedom of association, assembly, the right to organize, and collective bargaining. This includes the following rights:
Workers are free to form or join trade unions;
The formation, joining, and membership of a trade union must not be used as a reason for unjustified discrimination or retaliation;
Trade unions are free to operate in line with their constitutions and rules without interference from the authorities and
The right to strike and the right to collective bargaining.
Many countries in the world do not allow workers the freedom to form unions, to strike, and to engage in collective bargaining. According to the International Trade Union Confederation, 87 percent of countries have violated the right to strike, and 79 percent have violated the right to collective bargaining.
In countries where there is no right to form labor unions, right to strike, or right to collective bargaining, but also no prohibition, the Directive may require in-scope companies to afford their workers these rights, as a matter of EU law.
Climate Change Transition Plans
The Directive will require in-scope companies to adopt and put into effect a transition plan that aims to ensure that the business model and strategy of the company are compatible with the Paris Agreement’s objective of limiting global warming to 1.5°C and the EU regulation establishing the objective of achieving climate neutrality, including its intermediate and 2050 targets. The transition plans will be required to:
Cover the entire group’s operations and include its suppliers and other business partners;
contain time-bound targets related to climate change for 2030, then in five-year incremental steps up to 2050;
Include absolute emission reduction targets for Scope 1, Scope 2, and Scope 3 greenhouse gas emissions, as well as the critical actions planned to reach those targets,
Explain and quantify the investments and funding supporting the transition plan; and to be updated every twelve months, together with a report on the progress made towards achieving the plan’s targets.
The Directive contemplates that the national supervisory authorities charged with implementing its provisions shall be required to supervise the adoption and design of the plan.
While many MNEs have adopted action plans to reduce greenhouse gases, in most cases, these initiatives have been voluntary, not based on governmentally mandated targets, not extended to their supply chain and distributors, and not subject to governmental oversight. The Directive proposes to change all that for in-scope MNEs and, indirectly, their business partners.
As the Paris Agreement’s objective of limiting climate change to a 1.5°C increase is, at this point, ambitious, to have the desired impact, transition plans will have to be similarly ambitious. It is not clear whether there will continue to be political support within the EU for the radical reductions in greenhouse gas emissions that companies will need to implement to meet the plans’ stated objectives. However, if the EU is willing to exert maximum pressure on its own companies to convert rapidly to renewable energy sources and energy-efficient modes of production and transportation, the EU may be particularly insistent on forcing non-EU MNEs to take the same bold steps.
The activities of NGOs are likely to be relevant in this context. Within the EU, there have been several high-profile lawsuits designed to force companies to act more aggressively to reduce greenhouse gas emissions. NGOs see an opportunity to use the Directive to force both EU and non-EU companies into faster and bolder action. They may also use the transposed laws to seek damages or remediation for the adverse impacts allegedly caused by the failure to implement efficacious transition plans in line with the Directive’s requirements.
Environmental Degradation
The Directive will require in-scope companies to avoid causing any measurable environmental degradation, such as harmful soil change, water or air pollution, harmful emissions, excessive water consumption, degradation of land, or other impact on natural resources that has any one of a range of adverse environmental impacts. It will also require in-scope companies to avoid or minimize adverse impacts on biological diversity.
Freedom Of Expression, Privacy, And Correspondence
The Directive prohibits arbitrary or unlawful interference with a person’s privacy, family, home, or correspondence, interpreted in line with Article 17 of the ICCPR. Article 19 of the ICCPR, also covered by the CSDDD, includes the right to hold opinions without interference and the right to freedom of expression, regardless of frontiers, orally, in writing, in print, or through any other media. Protecting these rights may prove challenging for telecommunications and social media companies operating in repressive countries.
Governments often request personal information from social media and telecom companies in the course of criminal investigations or for other legitimate reasons. Repressive regimes, however, often demand access to customer information to track down individuals who have criticized the government or who support the political opposition. Those governments may use that information to detain, interrogate, or incarcerate dissidents and political opponents. Repressive regimes regularly compel companies to block websites and shut down services to suppress political criticism or prevent reporting of human rights abuses.
When faced with a government demand for access to an email account or telephone line, even when it knows or guesses that the reason may lead to a violation of human rights, a telecom may often have no choice but to comply, as to refuse will be a criminal offense and may result in its subsidiary’s employees being arrested and prosecuted. To accede to the government’s demand may, however, result in the company’s customer being arrested and prosecuted in violation of their human rights. This is not a new dilemma. However, under the laws contemplated by the Directive, it may evolve from an ethical dilemma to a conflict between diametrically opposed legal requirements.
Evictions And Takings
The Directive will also require in-scope companies to respect the right of individuals, groupings, and communities to lands and resources and the right not to be deprived of means of subsistence. This entails the prohibition of unlawfully evicting or taking land, forests, and waters when acquiring, developing, or otherwise using them, including by deforestation, the use of which secures a person’s livelihood.
This requirement will impose on in-scope companies an obligation to ensure when acquiring land or water rights, etc., that the land is not occupied or in use as farm or grazing land by individuals who will be adversely affected by their dispossession of the land unless adequate arrangements have been made to compensate them and protect their interests. The Directive’s interpretive guidance makes clear that particular attention must be paid to situations in which the people being dispossessed are individuals from disadvantaged minority groups, low-caste individuals, indigenous peoples, or others who may be particularly vulnerable.
It is not uncommon for complaints regarding the displacement of Indigenous, minority, low-caste, or otherwise marginalized peoples, whose claim to the land is often undocumented, to arise in large-scale development projects. Similarly, complaints often arise regarding a project’s likely adverse impact on drinking water, fish, or other resources and the adverse impact that will have on local people.
NGOs often champion the rights of the affected people in local courts. Still, particularly in cases where there is significant government backing for the project, local courts may be unsympathetic or grant only nominal compensation. The CSDDD offers an alternative, potentially more sympathetic, venue for NGOs to pursue these claims.
Next steps
U.S. companies should assess the potential impact of the Directive on their global operations, follow closely further developments as the CSDDD is transposed into national laws, and use the time before these laws become applicable to prepare to meet the compliance challenges they present.
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