The EU has the legally binding goal of becoming the world's first climate-neutral continent by 2050. In order to achieve this, the EU has introduced more stringent requirements for larger companies in order to ensure sustainability throughout the production and supply chain. An EU Directive for due diligence in relation to the environment and human rights (Corporate Sustainability Due Diligence Directive) was adopted on 13 June 2024. The Directive, also known as the CSDDD, or CS3D, contains extensive requirements for companies to identify and, whenever necessary, guard against, prevent, cease or mitigate adverse effects on human rights and the environment caused by their activities and also the activities of their business partners.
Which companies are affected by the CSDDD?
The CSDDD affects very large companies, which means around 5,000 companies or 0.05% of all companies in the EU. As far as Sweden is concerned, it is estimated that just over 300 companies are affected.
The requirements of the Directive begin to apply gradually to companies in the EU that meet the following criteria:
- From 26 July 2027, individual companies and the ultimate parent company in groups with more than 5,000 employees and global net sales exceeding EUR 1.5 billion,
- From 26 July 2028, individual companies and the ultimate parent company in groups with more than 3,000 employees and global net sales exceeding EUR 900 million,
- From 26 July 2029, individual companies and ultimate parent companies with more than 1,000 employees and global net sales exceeding EUR 450 million.
The requirements will also include companies registered outside the EU which have net sales in the EU in accordance with points 1, 2 or 3 above. In addition, companies or the ultimate parent company in groups that have entered into franchise or licensing agreements in the EU with a particular value may also be subject to the requirements.
However, even if small and medium-sized companies are not directly affected by the CSDDD, they are affected by the provisions of the Directive in their capacity as business partners or suppliers of the companies to which the Directive applies. In order to implement human rights and environmental standards in their business chains, companies already use a number of different contract structures in their relations with their business partners. The Directive also contains rules in this regard aimed at ensuring that requirements regarding precautions imposed on large companies are not transferred to small and medium-sized suppliers.
What requirements does the Directive impose on companies?
The CSDDD requires companies to carry out due diligence processes for their business chains. Due diligence processes in business chains must be carried out with the aim of identifying and, where appropriate, working to deal with companies’ adverse impact on human rights and the environment. The Human Rights and Environmental Due Diligence (HREDD) process involves six steps:
- integrating HREDD into policies and management systems,
- identifying and assessing adverse impacts on human rights and the environment,
- preventing, stopping or minimising actual or potential adverse impacts on human rights and the environment,
- monitoring and assessing the effectiveness of measures,
- communicating, and
- providing remedial action.
The CSDDD also requires companies to adopt and implement an operating plan for the climate transition in accordance with the goals of the Paris Agreement. The Directive imposes far-reaching requirements on the boards of directors and managements of the companies concerned in order to ensure that the companies endeavour to achieve satisfactory sustainability in line with human rights.
To ensure compliance, the CSDDD contains rules regarding claims and supervision. The supervisory authority must have the power to order the fulfilment of a company’s obligations and impose sanctions such as fines based on the company’s global net sales (up to a maximum limit that may not be lower than 5%), i.e. it may be a question of large amounts.
The Member States must also introduce rules on claims for damages that will be triggered if companies neglect to fulfil their obligations and the omission leads to an adverse effect that entails damage that should have been identified, prevented, limited, stopped or minimised through suitable measures. In the event of damage, companies may be required to pay full compensation for the damage in accordance with national law.
What happens now?
The CSDDD entered into force on 25 July 2024. The Member States, including Sweden, must have implemented the Directive in national law within two years at the latest, i.e. by 26 July 2026. One year later, on 26 July 2027, the rules will start to apply to the largest companies affected by the Directive.
In view of the design of the Directive, the legislation introduced in order to implement the Directive will entail major challenges for companies that are not already actively working on these matters. It is therefore important for companies to map their business chains now and investigate, among other things, how business partners and suppliers are working on human rights and environmental issues. The purpose of this is to be as well prepared as possible for compliance with future legal requirements.
Prioritising ESG work also creates added value for the companies' operations as a whole and is a success factor in attracting capital. One positive example for Sweden is the fact that Swedish impact companies brought in the most capital in Europe last year. According to a report from Sweden Tech Ecosystem, almost 75% of Swedish venture capital was invested in impact companies in 2023. These companies were defined in the report as companies that meet at least one of the UN’s global sustainability goals. A total of EUR 4.7 billion was invested in the sector, putting Sweden in second place in Europe in terms of the amount of impact-focused capital. Companies should also prepare by reviewing their current processes and identifying areas where they need to make changes to meet the new requirements. By taking proactive steps, companies can not only ensure compliance; they can also strengthen their position as responsible and sustainable operators in the market.
