Covington’s CSDDD Deep Dive Series: 2. The CSDDD On Its Way to Binding Law: Next Steps to Watch For

Covington's CSDDD Deep Dive Series: 2. The CSDDD On Its Way to Binding Law: Next Steps to Watch For

October 22, 2024, Covington Alert

The first post in our CSDDD Deep Dive series provided an overview of the EU's Corporate Sustainability Due Diligence Directive ("CSDDD"). In this second post, we highlight key developments to watch between now and the dates on which the CSDDD will begin to apply to companies. This includes implementing legislation and guidance that the European Commission ("Commission") will adopt to give effect to the CSDDD, such as delegated acts that establish the CSDDD reporting criteria, implementing legislation with details on European Single Access Point submissions, and guidelines on topics including standard contractual clauses, due diligence best practices, risk factors, and the climate transition plan. We also discuss potential opportunities for engagement.

1. Transposition of the CSDDD by Member States

As a Directive, each EU Member State must transpose the CSDDD into its national law by July 26, 2026. Similarly, Norway, Liechtenstein, and Iceland will have to transpose the Directive into national law once the CSDDD is formally incorporated into the EEA Agreement. This is not expected to change the applicable timelines. It is this transposed national law, not the Directive itself, that applies to companies. The CSDDD does not permit Member States to go beyond (or "goldplate") certain due diligence provisions (e.g. certain measures companies must take to identify and assess, prevent and mitigate actual or potential adverse impacts). However, we can anticipate potentially significant variation between Member State laws on issues such as civil liability and penalties.

Companies should pay close attention to national transposition processes across Member States, particularly in jurisdictions that are the home states to their headquarters or key subsidiaries. States that may warrant particularly close monitoring include Germany and France, as these states already impose legal due diligence obligations on companies, as well as traditional corporate centers such as Belgium, Ireland, Luxembourg, and the Netherlands.

Of particular interest is Germany, where the government is understood to have made the transposition of the CSDDD a political priority ahead of the 2025 federal elections. The transposition of the CSDDD into German law could serve as a model for other EU Member States. German authorities already have experience in enforcing supply chain due diligence obligations, with the German Supply Chain Act ("GSCA") having been in effect since 2023 and thereafter enforced by the Federal Office of Economics and External Control ("BAFA"). We expect BAFA to be designated as the CSDDD supervisory authority. We will unpack lessons learned from GSCA implementation that may be helpful in preparation for CSDDD compliance in a forthcoming alert.

2. Secondary Legislation on the CSDDD Reporting Framework

The CSDDD requires the Commission to adopt delegated acts setting out key details regarding the CSDDD reporting obligation by March 31, 2027. The acts must establish the reporting criteria to be met by companies and the level of detail at which companies are required to report on due diligence, identified impacts and action taken to respond to those impacts. Note, however, that the CSDDD contains a broad reporting exemption for companies already reporting under the CSRD (see Art. 16(2)).

The EU's recently adopted European Single Access Point ("ESAP"), a centralized access point for all publicly available sustainability information on companies and products, will also serve a purpose for CSDDD. Under the CSDDD, the Commission must adopt implementing legislation that sets out details such as how data and information submitted to the ESAP must be structured and the machine-readable format to be used.

3. Commission Guidance

The CSDDD requires the Commission to issue guidelines (the "Guidelines") on key aspects of the Directive and affecting how companies approach implementation of their due diligence obligations. Although the Guidelines are not binding on Member States' authorities, they will be influential in enforcement practice.

The CSDDD sets out a roadmap for when the Guidelines are to be issued, with most due in 2027 (though in practice, there may be some delay, as is common with such guidance).

Guidance	What will the Guidance cover?	Deadline for Publication
Due diligence / Standard contractual clauses	Guidance and best practice for due diligence, including recommendations regarding how to adapt business practices to meet obligations, including purchasing practices and remediation. Contractual clauses: The Guidelines will include draft standard contractual clauses that meet the CSDDD's requirements and that companies can voluntarily include in contracts with business partners. Under the CSDDD, when implementing measures to prevent, mitigate, and bring to an end potential and actual adverse impacts that have been or should have been identified, companies are required to obtain contractual assurances from direct business partners, where relevant. The CSDDD requires such contractual assurances to include that undertakings will (i) comply with the company's code of conduct; and (ii) where applicable, comply with a prevention/corrective action plan.	January 26, 2027
Risk factors	Guidance to help identify, assess, and prioritize risk factors (across the company and its business operations, both geographic and contextual in nature, whether product or service related, and sectoral risk factors, including those associated with conflict-affected and high-risk areas).	January 26, 2027
Simplification	Guidance on data and information sources available to assist companies with compliance.	January 26, 2027
Climate transition plan	Guidance on how to adopt and implement climate transition plans, ensuring that companies' business models and strategies align with the EU's plans for a transition to a sustainable economy and a goal of limiting global warming to 1.5 degrees Celsius in line with the Paris Agreement.	July 26, 2027
Resource sharing among companies	Information on how companies must share resources and information to comply with national laws adopted to transpose the CSDDD.	July 26, 2027
Sector-specific guidance	Guidance and best practice for due diligence adapted to specific business sectors, as human rights/environmental risks can vary significantly depending on sector.	Not specified
Stakeholder engagement	Guidance on how stakeholders and their representatives can engage with companies to raise awareness of due diligence issues.	July 26, 2027

The CSDDD also requires the Commission to establish an EU-level helpdesk that will collaborate with designated national authorities to provide support to companies seeking information on their new obligations. Whilst no deadline is given for the establishment of the helpdesk, once Member States transpose the CSDDD, their national authorities will be tasked with tailoring and disseminating the information and guidance to the companies in their jurisdiction.

4. Policy engagement opportunities

Companies should have ample opportunity to engage with these policy developments in the coming years. With respect to the Guidelines in particular:

Who are the key players? The drafting and issue of the Guidelines will likely be led by the Commission Directorate-General for Justice and Consumers ("DG JUST"), supported by a committee of the Member States. Moreover, the CSDDD also provides for the creation of an expert group appointed by Member States (which may include representatives from NGOs and trade associations, at least as observers) and this expert group is expected to play an important role in shaping the content of the Guidelines.

What will the process look like? Starting this fall, companies will have the opportunity to participate in a comprehensive gap analysis led by the Commission, aimed at identifying the most pressing areas for developing guidelines under the CSDDD. To prepare the guidelines, DG JUST will likely conduct a series of stakeholder engagement activities, including a public consultation where organizations can share their perspectives on urgent needs and priorities. Additionally, a call for evidence will invite stakeholders to submit relevant data, insights, and references to existing materials, supporting the creation of effective guidelines and informing the prioritization of regulatory work. The Commission's dedicated outreach efforts will gather specific feedback to shape the guidelines. A subsequent consultation on the draft Guidelines will offer companies further opportunities to influence the final content and ensure the supporting measures align with industry needs under the CSDDD.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Business and Human Rights (BHR) and Environmental, Social, and Governance (ESG) practices.

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