What to expect from the EU’s CSDDD #3: key takeaways from Freshfields’ CSDDD webinar

On 22 May 2024, our global ESG group hosted a webinar discussing the key aspects of the new EU Corporate Sustainability Due Diligence Directive (CSDDD). Speakers from Freshfields shed light on the CSDDD’s specifics for non-EU companies, the new corporate compliance duties (especially the Climate Change Transition Plan), and the forthcoming civil liability and public enforcement regime, and were joined be Ms. Lucrezia Busa, Member of the Cabinet of the EU Commissioner for Justice, who provided valuable insights concerning the EU’s legislative process leading to the adoption of CSDDD.

We have summarized the key takeaways from the session below.

Impact on non-EU companies

• CSDDD applies to non-EU companies with a net turnover of more than EUR 450 million in the EU. These non-EU companies will be supervised by the supervisory authority of the Member State in which the non-EU company has a branch or generated the highest net turnover.
• As regards reporting, it does not seem to be fully clear yet whether non-EU parent companies whose EU subsidiary reports on sustainability under Art. 40a CSRD, i.e. with respect to the non-EU parent company, will be exempted from the reporting obligation under CSDDD. 

Focus on compliance and climate plan

• CSDDD prescribes specific corporate compliance obligations that become mandatory.
• In addition, the CSDDD introduces the corporate obligation to adopt and put into effect a transition plan for climate change mitigation that should aim at bringing the company’s business model and strategy in compliance with (i) the transition to a sustainable economy, (ii) the goal of limiting global warming to 1.5°C (in line with the Paris Agreement) and (iii) the aim to reach climate-neutrality. This obligation for the first time explicitly requires long-term corporate strategies on climate change mitigation.

Enforcement

• Member States designate competent authorities, which supervise compliance with all obligations under CSDDD, and are competent to take both preventive and repressive measures, i.e. order measures to take to be in compliance with the law and sanctioning failure to be non-compliant with the law, including (i) the imposition of fines of no less than 5 % of the company’s net worldwide turnover and (ii) issuing public statements indicating the company responsible and the nature of the infringement (‘naming and shaming’).
• As the first specialized enforcement agency for supply chain compliance globally, the German Supervisory Authority (BAFA) is sharing its experiences in supervising compliance with the German Supply Chain Duty of Care Act (LkSG) with other governments and national supervisory authorities worldwide. Hence, lessons learned by working and communicating with BAFA in Germany over the last 1.5 years is useful knowledge for the context of the CSDDD as well.

Civil liability regime

• The introduction of a civil liability regime is intended to provide effective access for victims to justice and full compensation (except for punitive damages) and blends in the continuing European trend to enforce regulations through private law. 
• Simple negligence regarding the failure to comply with the due diligence obligations under CSDDD suffices to trigger (potential) liability.
• Member States’ laws transposing CSDDD’s liability regime are overriding and mandatory, i.e., must apply even if the law of a third country would otherwise govern the claims
• CSDDD does not require Member States to provide for civil liability in relation to Climate Change Transition Plan obligations

Procedural framework 

• The key principles governing civil litigation under the CSDDD are (inter alia): (i) the limitation of costs of proceedings to a reasonable level, (ii) the possibility of injunctive relief, and (iii) a balanced approach to disclosure of evidence.
• Courts may order companies to disclose certain evidence lying in their control, if the claimant presents sufficient facts and plausible evidence to support the claim for damages.
• CSDDD itself does not provide for collective redress mechanism, but national collective redress mechanisms may be applicable for liability under CSDDD.

Next steps

• Member States need to transpose the CSDDD provisions into national law within two years after its entry into force.
• Note that CSDDD only sets minimum standards; Member States may introduce stricter obligations and liability rules.