News Flash Legal - Corporate Sustainability Due Diligence Directive: The European legal framework for due diligence practices in global chains of activity

On 5 July 2024, the Corporate Sustainability Due Diligence Directive (the “Directive”) [1] was published in the Official Journal of the European Union. The Directive entered into force on 25 July 2024, that being 20 days after its publication, and must be transposed by Member States into national law by 26 July 2026.

According to its recitals, this Directive aims to “ensure that companies active in the internal market contribute to sustainable development and the sustainability transition of economies and societies through the identification, and where necessary, prioritisation, prevention and mitigation, bringing to an end, minimisation and remediation of actual or potential adverse human rights and environmental impacts”, and ensuring that “those affected by a failure to respect this duty have access to justice and legal remedies”. To this effect, it introduces a series of material obligations for in-scope companies regarding the adverse impacts of their own operations on human rights and the protection of the Environment, as well as with respect to the operations of their subsidiaries, and the operations carried out by their business partners in the chains of activities of those companies. The Directive further provides for the liability of in-scope companies having breached their due diligence obligations. Companies are also required to adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, compatibility of the business model and of the strategy of the company with the transition to a sustainable economy and with the limiting of global warming to 1,5°C in line with the Paris Agreement.

Co-legislators finally opted for a phased application, whereby in-scope companies will begin applying the new rules gradually from 2027, depending on their reaching certain thresholds outlined in the Directive:

(a) from 26 July 2027 as regards companies, which are formed in accordance with the legislation of the Member State and that had more than 5,000 employees on average and generated a net worldwide turnover of more than EUR 1,500,000,000 in the last financial year preceding 26 July 2027 for which annual financial statements have been or should have been adopted, with the exception of the measures necessary to comply with Article 16 [2], which Member States shall apply to those companies for financial years starting on or after 1 January 2028;

(b) from 26 July 2028 as regards companies, which are formed in accordance with the legislation of the Member State and that had more than 3,000 employees on average and generated a net worldwide turnover of more than EUR 900,000,000 in the last financial year preceding 26 July 2028 for which annual financial statements have been or should have been adopted, with the exception of the measures necessary to comply with Article 16, which Member States shall apply to those companies for financial years starting on or after 1 January 2029;

(c) from 26 July 2027 as regards companies, which are formed in accordance with the legislation of a third country and that generated a net turnover of more than EUR 1,500,000,000 in the Union, in the financial year preceding the last financial year preceding 26 July 2027, with the exception of the measures necessary to comply with Article 16, which Member States shall apply to those companies for financial years starting on or after 1 January 2028;

(d) from 26 July 2028 as regards companies, which are formed in accordance with the legislation of a third country and that generated a net turnover of more than EUR 900,000,000 in the Union, in the financial year preceding the last financial year preceding 26 July 2028, with the exception of the measures necessary to comply with Article 16, which Member States shall apply to those companies for financial years starting on or after 1 January 2029;

(e) from 26 July 2029 as regards all other in-scope companies, except for the measures necessary to comply with Article 16, which Member States shall apply to those companies for financial years starting on or after 1 January 2029.

For more detailed information on the key aspects of the Directive, we invite you to read the Legal News Flash Legal published by the Luxembourg Chamber of Commerce on this topic, available here.

For further information, please kindly contact: evgenia.kyriakaki@cc.lu