The European Union’s Corporate Sustainability Due Diligence Directive (the “CSDDD” or “Directive”) was published on July 5, 2024. It must be transposed into national laws by July 26, 2026, and phased in over the coming several years. The national laws adopted pursuant to the Directive will ultimately apply to all companies that have annual group-wide net turnover (i.e., sales net of rebates, value-added tax, and similar taxes) in the EU of over €450 million (and, in the case of EU companies, also at least one thousand employees); to EU companies with annual franchising fees and/or royalties of at least €22.5 million and net turnover above €80 million; and to non-EU companies with those levels of franchising/royalty revenue in the EU.
Nearly all large U.S. multinational enterprises (“MNEs”) will be subject to these laws, because their European subsidiaries exceed the revenue thresholds, and/or because their global sales in and exports to the EU exceed €450 million. The largest MNEs will become subject to the laws beginning in 2027.
Because the due diligence review mandated by the Directive extends to in-scope MNEs’ supply chains, distribution channels, and other “business partners,” the human rights, environmental, and climate change requirements of the Directive will also indirectly impact many smaller companies (including U.S. companies that are not otherwise covered). Many of those companies will, however, be in a position to respond to the due diligence requests of in-scope companies because of their own obligations under the EU’s Corporate Sustainability Reporting Directive, which will apply to a much larger number of U.S. companies.
What does the Directive do?
The Directive will in effect convert the nonbinding obligations of the U.N. Guiding Principles on Business and Human Rights and the frameworks in the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct and OECD Due Diligence Guidance for Responsible Business Conduct into legal obligations binding on companies that fall within the CSDDD’s scope (“in-scope” companies or MNEs). Many large MNEs already seek to comply with these instruments. An even larger number purport to. These companies may already be well positioned to evaluate the potential significance of the Directive.
The Directive’s significance should not, however, be understated. It will cause the rights articulated in a variety of international agreements, all of which until now have been binding only on state parties (except to the extent enacted into domestic law by state parties), to become legally binding obligations enforceable against in-scope MNEs under the laws of all twenty-seven of the member states of the EU. Those agreements include three international human rights treaties—the International Covenant on Civil and Political Rights (“ICCPR”), the International Covenant on Economic, Social and Cultural Rights (“ICESCR”), and the Convention on the Rights of the Child—eight core/fundamental conventions of the International Labour Organization (“ILO”),[1] the core climate change mitigation objective of the Paris Agreement, and eleven environmental conventions. The U.S. has signed but not ratified the ICESCR and the Convention on the Rights of the Child; it has only signed two of the eight ILO conventions, and it has signed but not ratified three of the environmental conventions.
These international agreements articulate a lengthy list of rights and obligations and, if national authorities and courts in the EU enforce the provisions of the Directive as written, the potential impact will be significant. In-scope companies will be required (among other things):
- to ensure that their global operations and those of their supply chain comply with international standards in relation to workers’ rights, equal pay, union activities, etc., even when those standards go beyond the requirements of domestic law in the country of employment;
- to adopt and implement a transition plan to reduce their global greenhouse gas emissions in line with the Paris Agreement’s objective of limiting the temperature increase to 1.5°C above preindustrial levels and with the EU’s “net zero” targets;
- to avoid causing any measurable environmental degradation that has any one of a range of negative effects, anywhere in their global operations;
- to avoid violating others’ right to freedom of expression or interfering with persons’ privacy and correspondence; and
- to ensure that any land or other natural resources to be used by the companies is not taken from, and does not result in evictions of, persons or communities who thereby lose their ability to subsist or their means of livelihood.
Although styled as a “due diligence” directive, the name is somewhat misleading. If violations of rights are identified through the due diligence process (or by the parallel efforts of trade unions, NGOs, or other interested parties), the in-scope MNE will be required to eliminate or, if that is not possible, mitigate them.
The CSDDD raises many critically important questions, to which at present there are no clear answers. Among other aspects of the Directive, U.S. MNEs will need to focus on their own compliance, and the compliance of their supply chain and other business partners, with at least seven sets of rights and obligations set forth in the Directive.
Conditions of work
Among the rights listed in the Directive is the “right to enjoy just and favourable conditions of work,” including:
- a fair wage and an adequate living wage for employed workers,
- a decent living,
- safe and healthy working conditions, and
- reasonable limitation of working hours,
interpreted in line with Article 7 and 11 of the ICESCR, which clarify that the right to an adequate living wage and a decent living is intended to provide the worker and the worker’s family “an adequate standard of living for himself and his family, including adequate food, clothing and housing.”
Although over 170 countries have minimum wage laws,[2] and MNEs tend to pay above the going rate in most countries, enforcement of minimum wage laws differs significantly across countries. Categories of workers (e.g., agricultural, domestic, and younger) are often excluded from minimum wage laws,[3] and there is often a significant gap between the minimum wage and a living wage, as that term is defined by the ILO.
In-scope companies will need to conduct due diligence into these matters, both in their own global operations and in their supply chains, to determine whether their subsidiaries and their key suppliers meet the higher standard. According to data collected by the World Economic Forum, at present only 24 percent of employers currently pay a living wage globally.[4] The CSDDD will make this obligatory for in-scope companies.
Laws in many countries set maximum working hours, but enforcement varies, and there are significant exceptions.[5] Similarly, many countries have laws regulating the health and safety of workplaces, but in some countries there is little enforcement.
It appears that workers in non-EU countries, or an NGO or trade union acting on their behalf, will be able to lodge complaints with EU enforcement authorities or to bring suit in EU courts for a non-EU company’s alleged failure to pay a living wage or limit working hours. While in-scope companies will be required to seek contractual assurances from direct business partners that they will ensure compliance with these requirements as well, and verify compliance with those undertakings, it is not clear what an in-scope MNE is supposed to do, and what its liability may be, if the counterparty refuses to do so or if the MNE knows that the counterparty is not complying. The Directive provides some guidance on these matters, but further clarity in the transposed laws would be useful.
Equal pay and nondiscrimination
The Directive requires the transposed laws to prohibit unequal treatment in terms of employment, unless this is justified by the requirements of the employment. Unequal treatment includes, in particular:
- the payment of unequal remuneration for work of equal value; and
- discrimination on grounds of national extraction or social origin, race, color, sex, religion, or political opinion.
This right is to be interpreted in line with Article 7 of the ICESCR, which requires “equal remuneration for work of equal value without distinction of any kind, in particular women being guaranteed conditions of work not inferior to those enjoyed by men, with equal pay for equal work.”
Equal pay for equal work, and nondiscrimination in employment, are established legal principles in the EU,[6] U.S.,[7] and U.K.[8] and in several other countries, but legal protections for women and racial and ethnic minorities in many countries are nonexistent or weak.[9] Will the Directive result in the EU courts becoming the venue of choice for forcing MNEs to end unequal pay in all their subsidiaries? Will there be a requirement that plaintiffs first seek remedies in their own country, if an effective remedy is available there? Again, the implementing legislation may provide clarity.
Rights to form unions and to strike
The Directive also requires in-scope companies to ensure their workers are entitled to freedom of association, assembly, the right to organize, and collective bargaining. This includes the following rights:
- workers are free to form or join trade unions;
- the formation, joining and membership of a trade union must not be used as a reason for unjustified discrimination or retaliation;
- trade unions are free to operate in line with their constitutions and rules, without interference from the authorities; and
- the right to strike and the right to collective bargaining.[10]
Many countries in the world do not—at least in practice—allow workers the freedom to form unions (except, in some cases, those established by the government), to strike, and to engage in collective bargaining. According to the International Trade Union Confederation, 87 percent of countries have violated the right to strike, and 79 percent have violated the right to collective bargaining.[11]
In countries where there is no right to form labor unions, right to strike, and/or right to collective bargaining, but also no prohibition, the Directive may require in-scope companies (and their suppliers) to afford their workers these rights, as a matter of EU law. But what will this mean in practice? Will workers in non-EU countries be able to bring their unionization and collective bargaining disputes to EU courts, demanding the rights articulated in the relevant international conventions, even if those go beyond what they are entitled to under their own country’s laws? And what will the Directive’s requirements mean as applied to countries where independent labor unions are not permitted to exist, or where strikes are banned? Guidance on these points will be needed.
Climate change transition plans
The Directive will require in-scope companies to adopt and put into effect a “transition plan” that aims to ensure, through best efforts, that the business model and strategy of the company are compatible with the Paris Agreement’s objective of limiting global warming to 1.5°C and the EU regulation establishing the objective of achieving “climate neutrality,” including its intermediate and 2050 targets. The transition plans will be required:
- to cover the entire group’s operations, and include its suppliers and other business partners;
- to contain time-bound targets related to climate change for 2030, then in five-year incremental steps up to 2050;
- to include absolute emission reduction targets for Scope 1, Scope 2, and Scope 3 greenhouse gas emissions,[12] as well as the key actions planned to reach those targets,
- to explain and quantify the investments and funding supporting the transition plan; and
- to be updated every twelve months, together with a report on the progress made towards achieving the plan’s targets.
The Directive contemplates that the national supervisory authorities charged with implementing its provisions shall be required “to supervise the adoption and design of the plan.”
While many MNEs have adopted action plans relating to the reduction of greenhouse gases, in most cases these initiatives have been voluntary, have not been based on governmentally mandated targets, have not extended to their supply chain and distributors, and have not been subject to governmental oversight. The Directive proposes to change all that, for in-scope MNEs and, indirectly, their business partners.
As the Paris Agreement’s objective of limiting climate change to a 1.5°C increase is, at this point, ambitious (if not, according to some, impossible), to have the desired impact, transition plans will have to be similarly ambitious. It is not clear whether there will continue to be political support within the EU for the radical reductions in greenhouse gas emissions that companies will need to implement to meet the plans’ stated objectives. But if the EU is willing to exert maximum pressure on its own companies to convert rapidly to renewable energy sources and energy-efficient modes of production and transportation, the EU may be particularly insistent on forcing non-EU MNEs to take the same bold (and, in the short run, costly) steps.
The activities of NGOs are likely to be relevant in this context. Within the EU there have been several high-profile lawsuits designed to force companies[13] to act more aggressively to reduce greenhouse gas emissions. NGOs sense an opportunity to use the Directive to force both EU and non-EU companies into faster and bolder action. They may also use the transposed laws to seek damages and/or remediation for the adverse impacts allegedly caused by the failure to implement efficacious transition plans in line with the Directive’s requirements.
Environmental degradation
The Directive will require in-scope companies to avoid causing any measurable environmental degradation, such as harmful soil change, water or air pollution, harmful emissions, excessive water consumption, degradation of land, or other impact on natural resources (such as deforestation) that has any one of a range of adverse environmental impacts. It will also require in-scope companies to avoid or minimize adverse impacts on biological diversity.
It is not clear what this will mean in practice. One possibility is that the Directive will create a set of environmental laws applicable to all large MNEs, to be enforced by European governmental authorities and courts. If that is the intent, the EU or national EU governments will—one hopes—provide more detailed guidance on what is (and is not) considered a violation of the CSDDD’s general rules.[14]
Freedom of expression, privacy, and correspondence
The Directive prohibits arbitrary or unlawful interference with a person’s privacy, family, home, or correspondence, interpreted in line with Article 17 of the ICCPR. Article 19 of the ICCPR, also covered by the CSDDD, includes the right to hold opinions without interference, and the right to freedom of expression, regardless of frontiers, orally, in writing or in print, or through any other media. Protecting these rights may prove challenging for telecommunications and social media companies (among others) operating in repressive countries.
Governments often request personal information from social media and telecom companies, in the course of criminal investigations or for other legitimate reasons. Repressive regimes will, however, often demand access to customer information in order to track down individuals who have criticized the government, or who support the political opposition. Those governments may use that information to detain, interrogate, and/or incarcerate dissidents and political opponents. Companies are regularly compelled by repressive regimes to block websites and shut down services to suppress political criticism or prevent reporting of human rights abuses.
When faced with a governmental demand for access to an email account or telephone line, even when it knows or guesses that the reason may lead to a violation of human rights, a telcom may often have no choice but to comply, as to refuse will be a criminal offense and may result in its subsidiary’s employees being arrested and prosecuted. To accede to the government’s demand may, however, result in the company’s customer(s) being arrested and prosecuted (or jailed without charges), in violation of their human rights. This is not a new dilemma. But under the laws contemplated by the Directive, it may evolve from being an ethical dilemma to being a conflict between diametrically opposed legal requirements.[15]
Evictions and takings
The Directive will also require in-scope companies to respect “the right of individuals, groupings and communities to lands and resources and the right not to be deprived of means of subsistence, which entails the prohibition to unlawfully evict or take land, forests and waters when acquiring, developing or otherwise using land, forests and waters, including by deforestation, the use of which secures the livelihood of a person.”
This requirement will impose on in-scope companies an obligation to ensure, when acquiring land or water rights, etc. (e.g., for the construction of a new factory or other asset), that the land is not occupied or in use as farm or grazing land by individuals who will be adversely affected by their dispossession of the land, unless adequate arrangements have been made to compensate them and protect their interests. The Directive’s interpretive guidance[16] makes clear that particular attention must be paid to situations in which the people being dispossessed are individuals from disadvantaged minority groups, low-caste individuals, indigenous peoples, or others who may be particularly vulnerable.
It is not uncommon, in large-scale development projects, for there to be complaints regarding the displacement of indigenous, minority, low-caste, or otherwise marginalized peoples, whose claim to the land is often undocumented. Similarly, there are often complaints regarding a project’s likely adverse impact on drinking water, fish, or other resources, and the adverse impact that will have on local people.
NGOs often champion the rights of the affected people in local courts, but particularly in cases where there is significant government backing for the project, local courts may be unsympathetic, or grant only nominal compensation. The CSDDD seems to offer alternative, potentially more sympathetic, venues for NGOs to pursue these claims.
Next steps
Particularly if not implemented with clarity, practicality, and nuance, the laws promulgated pursuant to the CSDDD will present significant challenges for in-scope MNEs, including even those that already strive to comply with the U.N. Guiding Principles and the OECD Guidelines for Multinational Enterprises. It is important that the EU, and the twenty-seven national governments that will be transposing the Directive into national law and then enforcing it, implement the Directive in a manner that is realistic and responsive to the practical realities faced by MNEs in complex business environments.
U.S. companies should assess the potential impact of the Directive on their global operations, follow closely further developments as the CSDDD is transposed into national laws, and use the time before these laws become applicable to prepare to meet the compliance challenges they present.
Freedom of Association and Protection of the Right to Organise Convention, 1948 (No. 87); Right to Organise and Collective Bargaining Convention, 1949 (No. 98); Forced Labour Convention, 1930 (No. 29) and its 2014 Protocol; Abolition of Forced Labour Convention, 1957 (No. 105); Minimum Age Convention, 1973 (No. 138); Worst Forms of Child Labour Convention, 1999 (No. 182); Equal Remuneration Convention, 1951 (No. 100); and Discrimination (Employment and Occupation) Convention, 1958 (No. 111). ↑
“Living Wage,” U.N. Global Compact, accessed July 11, 2024. ↑
See ITUC Global Survey on Minimum Living Wages: Key Findings, International Trade Union Confederation (“ITUC”) (Jan. 2024), at 5. ↑
See Victoria Masterson, “Explainer: What is a living wage and how is it different from the minimum wage?,” World Economic Forum (Apr. 9, 2024). ↑
See Sangheon Lee, Deirdre McCann, and Jon C. Messenger, Working Time Around the World: Trends in working hours, laws and policies in a global comparative perspective (London: Routledge, 2007). ↑
See Art. 157 of the Treaty on the Functioning of the European Union, and Directive 2006/54/EC on the implementation of the principle of equal opportunities and equal treatment of men and women in matters of employment and occupation (July 5, 2006). ↑
Equal Pay Act of 1963 (Pub. L. 88-38), as amended, and Title VII of the Civil Rights Act of 1964 (Pub. L. 88-352). ↑
See Women, Business and the Law 2024, World Bank Group (Mar. 4, 2024); “ITUC Policy Brief: Trade union action to promote equal pay for work of equal value,” ITUC (Sept. 14, 2023). ↑
These rights are to be interpreted in line with Articles 21 and 22 of the ICCPR, Article 8 of the ICESCR, the ILO Freedom of Association and Protection of the Right to Organise Convention, 1948 (No. 87), and the ILO Right to Organise and Collective Bargaining Convention, 1949 (No. 98). ↑
Global Rights Index 2024, ITUC (2024), at 8. ↑
Scope 1 greenhouse gas emissions are those that are produced from sources that are owned or controlled by the corporate group. Scope 2 emissions are those that result from the production of electricity, and heating and cooling purchased by the corporate group. Scope 3 emissions are those emitted by the company’s value chain, including those produced by suppliers, distributors, and product usage, to the extent not included in Scope 2. ↑
See, e.g., Milieudefensie v. Royal Dutch Shell plc, Case No. C/09/571932 (May 26, 2021). Shell has appealed the decision. ↑
The CSDDD will also require covered companies to comply with the terms of about ten international environmental treaties. Because most of these conventions make clear what is prohibited or required, companies with operations that may be covered by their provisions will have greater clarity on what is required. ↑
The word “unlawful” will not resolve the legal conflict. The U.N. Human Rights Committee has clarified that the word “unlawful” means that no interference can take place except in cases envisaged by the law, and that the law must comply with the provisions, aims, and objectives of the Covenant. ICCPR General Comment No. 16 (1988). ↑
These rights are to be interpreted in line with Article 1 and 27 of the ICCPR and Article 1, 2, and 11 of the ICESCR. Article 27 of the ICCPR provides that where ethnic, religious, or linguistic minorities exist, persons belonging to such minorities shall not be denied the right, in community with the other members of their group, to enjoy their own culture, to profess and practice their own religion, or to use their own language. Article 2 of the ICESCR includes a requirement that rights be exercisable without discrimination of any kind as to race, color, sex, language, religion, political or other opinion, national or social origin, property, birth, or other status. ↑
