On 24 May 2024, the Council of the European Union (the EU) formally adopted the Corporate Sustainability Due Diligence Directive (the Directive) as part of the EU Green Deal. This Directive represents a significant advancement in human rights and environmental protection, aiming to promote sustainable and responsible corporate behaviour across global value chains. While some EU Member States have already adopted similar laws, the Directive seeks to standardise these regulations, ensuring a level playing field for companies operating within the EU.
What is the Directive?
The Directive introduces obligations for “large companies” regarding the adverse impacts of their activities on human rights and environmental protection. Its aim is to promote sustainable and responsible corporate behaviour both in company operations and throughout their global value chains. The new rules require companies falling within the scope of the Directive to identify and address adverse human rights and environmental impacts of their activities, both within Europe and internationally. Additionally, the Directive requires large companies to use their best efforts to adopt and implement a transition plan for climate change mitigation. This plan must align with the 2050 climate neutrality objective of the Paris Agreement and include intermediate targets as outlined in the European Climate Law.
It is important to note that the Directive does not override obligations under other EU laws in areas such as human rights, employment, social rights, environmental protection, and climate change. In cases where there is a conflict between the Directive and another EU law that has more stringent obligations and pursues similar objectives, the latter will take precedence.
Scope of the Directive
The Directive applies to large EU companies, defined as companies of more than 1,000 employees with a global turnover exceeding EUR 450,000,000, as well as to non-EU companies that meet the Directive’s criteria. Companies are required to ensure that human rights and environmental obligations are respected along their chain of activities, including the supply chain, manufacturing, and distribution. These obligations extend beyond the companies’ own operations to include the activities of their subsidiaries and business partners throughout their entire chain of activities.
Enforcement and consequences of the Directive
Member States shall designate an authority to oversee and enforce the rules, utilising injunctive orders and imposing effective, proportionate, and dissuasive penalties, including fines. At the European level, the Commission will establish a European Network of Supervisory Authorities, bringing together representatives from national bodies to ensure a coordinated approach. For third-country companies, the competent authority shall be the Member State where the company in question has a branch or, if not applicable, where it generated most of its net turnover in the EU.
Furthermore, one of the key provisions of the Directive is the rule on civil liability (Article 29), which holds companies accountable for damages caused by breaches of the Directive’s provisions. Companies can be held liable for damages caused to natural or legal persons if they intentionally or negligently fail to comply with the obligations under the Directive and, as a result, cause damage to the person’s legal interests protected under national law.
Member States will have two years to transpose the Directive into national law and communicate the relevant texts to the Commission. One year later, the rules will start to apply to companies, with a gradual phase based on the size of the companies:
- 3 years from the Directive’s entry into force for companies with more than 5,000 employees and a turnover exceeding €1,500 million;
- 4 years from the Directive’s entry into force for companies with more than 3,000 employees and a turnover exceeding €900 million and
- 5 years from the Directive’s entry into force for companies with more than 1,000 employees and a turnover exceeding €450 million.
Previous position of the law
Prior to the adoption of the Directive, various Member States had implemented their own laws regarding corporate sustainability and human rights. However, these laws were not uniform, leading to discrepancies in corporate responsibility standards across the EU. The absence of a unified framework meant that companies operating in multiple Member States faced different regulatory requirements, complicating compliance efforts and potentially diminishing the effectiveness of human rights and environmental protections. The Directive aims to address these inconsistencies by creating a standardised set of rules for all companies operating within the EU, regardless of their origin.
Final remarks
The Directive represents a significant step towards harmonising corporate sustainability and human rights regulations across the EU. Overall, the Directive underscores the EU’s commitment to sustainable development and responsible business practices, with far-reaching implications for businesses within and beyond Europe.
For businesses in Cyprus, this Directive will necessitate a comprehensive review and adjustment of operational practices to ensure compliance. Cypriot companies, particularly those with extensive supply chains and international operations, will need to adopt robust due diligence measures to identify and mitigate adverse impacts on human rights and the environment.
For more information or any inquiries, please feel free to write to the members of the Energy & Natural Resources team or contact us at [email protected].