In June 2024, the European Parliament approved the Corporate Due Diligence in Sustainability Directive. Its goal is to ensure that companies contribute to the EU’s strategy of integrating “Environmental, Social, and Governance” (ESG) criteria into corporate structures. This requires businesses to adopt policies that respect human rights and protect the environment across their operations, subsidiaries, supply chains, and business partners. Companies must identify, prioritize, prevent, mitigate, minimize, and remediate adverse impacts, while ensuring access to justice and remedies for affected parties in cases of non-compliance.
Key Actions for Companies
Obligated companies are required to:
- Integrate due diligence into internal policies.
- Prevent or mitigate identified negative impacts.
- Monitor the effectiveness of measures taken.
- Remedy harm caused, which may include compensation payments.
Implementation Timeline
EU Member States have until July 26, 2026, to transpose the Directive into national law. The obligations will be phased in gradually:
- July 2027: Companies with more than 5,000 employees and global revenues exceeding €1.5 billion.
- July 2028: Companies with more than 3,000 employees and global revenues of €900 million or more.
- July 2029: All remaining obligated companies with over 1,000 employees and global revenues exceeding €450 million.
The Directive also applies to franchise or licensing chains with revenues over €80 million (of which at least €22.5 million must come from royalties) starting July 2029.
Oversight and Sanctions
Each Member State will designate an authority to monitor compliance. These authorities can impose fines of up to 5% of a company’s global net revenue from the previous fiscal year for breaches.
Impact on Sustainability Reporting
The Directive will influence sustainability reporting requirements for large companies beginning in 2025, under the Corporate Sustainability Reporting Directive. This is part of a broader regulatory framework focusing on ESG compliance, driving significant transformation in corporate obligations.
Impact on Small and Medium Enterprises (SMEs)
While SMEs are not directly obligated under the Directive, they will be indirectly affected through interactions with companies that must comply. Large companies are required to ensure compliance across their supply chains, which includes subcontracted SMEs.
To mitigate the financial and administrative burden on SMEs, Member States, with EU support, must:
- Establish specialized and user-friendly platforms, websites, or portals to provide information and assistance to SMEs.
- Offer financial aid and capacity-building support to SMEs to help them meet ESG compliance requirements.
Large companies are also encouraged to support their SME partners by:
- Helping them meet due diligence obligations.
- Applying fair, reasonable, non-discriminatory, and proportionate requirements on SMEs.
Broader Implications
The Directive represents a significant step toward embedding sustainability into corporate operations, ensuring human rights and environmental protection while fostering responsible business practices. As the EU strengthens its ESG framework, companies across all sectors will face transformative changes that will influence their operations, strategies, and relationships with stakeholders.
