The European Council announced today the approval by member states of the Corporate Sustainability Due Diligence Directive (CSDDD), marking the final step in the adoption of legislation setting mandatory obligations for large companies to address their negative impacts on human rights and the environment across their value chains.

The final adoption of the directive had come into significant doubt in recent months, when an earlier version failed to gain approval by member states in the Council, requiring revisions in the legislation that significantly scaled back the number of companies covered by the law, and extended the timeline to its full implementation.

The CSDDD was initially proposed by the European Commission in February 2022, setting out obligations for companies to identify, assess, prevent, mitigate, address and remedy impacts on people and planet – ranging from child labor and slavery to pollution and emissions, deforestation and damage to ecosystems – in their upstream supply chain and some downstream activities such as distribution and recycling.

The directive also requires companies to adopt transition plans to align their businesses with the Paris Agreement goal with limiting global warming to 1.5°C, and mandates member states to put in place supervisory authorities to investigate and impose penalties on non-complying firms.

Although the EU Parliament and Council reached an agreement on the new legislation in December 2023, the approval vote in Council was postponed in January after Germany threatened to not support the regulation on concerns of the bureaucratic and potential legal impact it would have on companies. The legislation was thrown into further doubt when Italy reportedly also subsequently pulled its support, ultimately failing to pass in late February after a last minute effort by France to significantly scale back the scope of the new rules to only the largest companies in the EU.

Following some significant compromises on the legislation, the Council finally approved a revised CSDDD in March. One of the key changes was a significant scaling back of the number of companies covered by the legislation, raising the thresholds to companies with at least 1,000 employees, up from 500, and to those with revenue greater than €450 million, up from €150 million. The new thresholds cut back the number of companies in the scope of the CSDDD by roughly two thirds. Lower thresholds that had been in place for high-risk sectors were also removed, with the possibility to be reconsidered later.

Additional changes to the CSDDD included phasing in the legislation, beginning with companies with over 5,000 employees and revenue greater than €1.5 billion in 2027, followed by companies with more than 3,000 employees and €900 million revenues in 2028, and for all other companies in the scope of the law in 2029. The revised CSDDD also removed the requirement for companies to promote the implementation of climate transition plans through financial incentives.