The future of business leads through ethics and sustainability

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On 24 May 2024, the new Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 was approved. Member States have until 26 July 2026 to transpose the Directive into their national law, but from experience we recommend that preparations to comply with the Directive's dictates start now.

The new directive aims to:[1]

A: In the area of "E" (Environment) and "S" (Social):

more accurate identification and assessment of actual and potential adverse impacts on human rights and the environment, not only in the companies directly affected by the new Directive, but also in their subsidiaries and supply chains;[2]
implementing preventive and remedial (appropriate) measures[3] when adverse impacts of corporate activities on human rights and the environment are identified;[4]

B: In the area "G" (Governance):

harmonize sustainability due diligence standards on human rights and environmental standards for sustainable business development;
stakeholder involvement in the due diligence process; Reporting obligations (reporting) on and transparency of due diligence activities developed;
the introduction of a code of conduct for companies, their subsidiaries as well as their suppliers (due diligence in risk management policies and systems in companithees concerned and at all levels of operation);

C: Other:

putting in place mechanisms to compensate companies, their subsidiaries and their suppliers for damages arising from adverse actions.

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1. Who exactly will be affected by the new directive?

The new Directive applies both to businesses operating in the EU single market whose activities may adversely affect human rights and the environment, and to businesses outside the EU, and the criteria for the businesses affected have been set out as follows:

COMPANIES OPERATING IN THE EU^*

more than 1,000 employees (including agency staff)
global turnover of more than €450 million in the last financial year
companies that have entered into franchise/licensing agreements in the Union if royalties amount to more than €22.5 million in the lastfinancial year
companies that have entered into franchise/licensing agreements in the Union and had a net global turnover of more than €80 million

COMPANIES BASED OUTSIDE THE EU with significant activities in the EU^*

a global turnover of more than €450 million in the EU in the financial year preceding the last financial year
companies that have entered into franchise/licensing agreements in the Union if royalties amount to more than €22.5 million in the lastfinancial year
companies that have entered into franchise/licensing agreements in the Union and had a net global turnover of more than €80 million in the EU in the financial year preceding the last financial year
^{* the same applies to the ultimate parent companies of groups of companies that together meet the following conditions}

However, the CSDDD will also affect SMEs indirectly through their participation in the supply chains of companies regulated by the Directive.

The CSDDD does not apply to pension institutions operating social security schemes under Union law .[5]

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2. What benefits can be expected from the Directive?

The new CSDDD responds to the need to harmonize rules between EU Member States to avoid legal fragmentation that could lead to divergent application of human rights and environmental standards and thus provide legal certainty for businesses operating in the internal market[6] Positive benefits of the new Directive include:

increasing the competitive advantage for companies applying ESG directives and regulations in their business, including the new Directive;
increasing transparency and knowledge of the supply chain;
alignment of policies also (with) small and medium-sized enterprises where they are in the supply chain of companies already affected by the Directive;
greater involvement of stakeholders, i.e. employees of companies, subsidiaries, trade unions, consumers and others whose rights or interests are or could be affected by non-compliance with “human rights and environmental sustainability regulations”;
opportunities to improve risk management, the planning of their activities and the reputation of the companies concerned;
creating the conditions for fair competition.

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3. What are the consequences for companies that do not comply with the rules set out in the CSDDD?

Perhaps the most significant and feared consequence is the so-called Cost of Inaction (COI), which in practical terms will be reflected in the reputation of the business (i.e. the reputation of the business may deteriorate if it fails to pursue and comply with the objectives set by the relevant ESG directive or regulation). This may in turn lead to a loss of confidence of its business partners, poorer availability of credit or loans or, in extreme cases, to the dissolution (non-establishment) of cooperation.

The possibility of publishing a company on the so-called sanction list (naming and shaming principle) within the meaning of Article 27(3)(b) of the CSDDD[7] is also related to the loss or threat to reputation.

An equally unpleasant consequence is the financial penalties, which, according to Article 27(3)(a) of the CSDDD[(8] , can be up to 5% of a company's net worldwide turnover in the financial year preceding the financial year in which the decision to impose a fine was taken.

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4. Obligations of Member States under the CSDD

The obligations that apply to Member States under the CSDDD include, according to Article 29 of the CSDDD, to ensure:

the right to recover damages caused to a natural or legal person as a result of intentional or negligent failure to comply with the obligation laid down in Articles 10 and 11 of the CSDDD in accordance with national law;
that the limitation period under national law is at least 5 years, or that the limitation period under national law is not shorter;
that the limitation period does not start to run before the infringement of the right ends or before the claimant becomes aware of it;
that the costs of the damages procedure are not prohibitively expensive for the claimant;
administrative supervision.

In pursuing a right to damages in relation to a company's breach of its obligations under the CSDDD, claimants may seek injunctive relief (e.g. in the form of a final or interim measure), including through summary proceedings.

Sooner or later, the introduction of ESG-compliant standards, their monitoring and subsequent reporting will affect every business, whether large, medium or small. So don't put off implementing them in your policies "until tomorrow" but prepare for it today. If you need help navigating the topic of ESG and/or preparing a sustainability questionnaire for your supply chain, contact our experts at Lansky, Ganzger, Jacko & Partner, Ltd.

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[1] Point 16 of the CSDDD Guidelines

[2] Article 8(1) of the CSDDD: "Member States shall ensure that companies take appropriate measures, in accordance with this Article, to identify and assess actual and potential adverse impacts arising from their own activities or from the activities of their subsidiaries and, where they relate to their chains of activities, from the activities of their business partners."

[3] Article 10(1) of the CSDDD: 'Member States shall ensure that companies take appropriate measures, in accordance with Article 9 and this Article, to prevent potential adverse impacts that have been or should have been identified pursuant to Article 8 or, where the prevention of such impacts is not possible or not immediately feasible, appropriate measures to mitigate them adequately. In determining the appropriate measures referred to in the first subparagraph, due account shall be taken of:

a) whether the potential adverse effect may be caused solely by the company; whether it may be caused jointly by the company and a subsidiary or a business partner through acts or omissions; or whether it may be caused solely by a business partner of the company in a chain of activities;

b) whether the potential adverse effect may arise from the activities of a subsidiary, direct or indirect business partner, as well as

c) the ability of the company to influence a business partner that may be causing the potential adverse effect alone or jointly."

[4] Article 8(2) of the CSDDD: "Within the framework of the obligation set out in paragraph 1, companies shall, taking into account the relevant risk factors, take appropriate measures to:

a) mapping its own activities, those of its subsidiaries and, where they relate to its chains of activities, those of its business partners, in order to identify the general areas where adverse impacts are most likely to occur and where those impacts are most severe;

b) on the basis of the results of the mapping exercise referred to in point (a), carrying out an in-depth assessment of its own activities, those of its subsidiaries and, where they are related to their chains of activities, those of its business partners in the areas where adverse impacts are most likely to occur and where those impacts are most likely to be significant."

[5] Point 18 of the CSDDD Directive

[6] Point 31 of the CSDDD Guidelines

[7] Article 27(3) of the CSDDD: "Member States shall provide for at least the following penalties:

a) Monetary penalties;

b) if the company fails to comply with the decision imposing a financial penalty within the relevant time limit, a public statement indicating the company responsible for the infringement and the nature of the infringement."

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