Preamble 21 to 30.
(21) In order to make due diligence more effective and reduce the burden on companies, they should be entitled to share resources and information within their respective groups of companies and with other legal entities. Parent companies falling under the scope of this Directive should be allowed to fulfil some of the due diligence obligations also on behalf of their subsidiaries that fall under the scope of this Directive, if that ensures effective compliance.
This should be without prejudice to the subsidiaries being subject to the exercise of the supervisory authority’s powers and to them being subject to civil liability under this Directive. Where a parent company fulfils the obligations with regard to combatting climate change on behalf of a subsidiary, the subsidiary should comply with those obligations in accordance with the parent company’s climate change mitigation plan accordingly adapted to its business model and strategy.
If the subsidiary does not fall under the scope of this Directive, since the subsidiary is not obliged to carry out due diligence, the parent company should cover operations of the subsidiary as part of its own due diligence obligations. If the subsidiaries fall under the scope of this Directive, but the parent company does not, they still should be allowed to share resources and information within the group of companies. Nevertheless, the subsidiaries should be responsible for fulfilling due diligence obligations provided for in this Directive.
(22) The fulfilment of some of the due diligence obligations at a group level should be without prejudice to the civil liability of subsidiaries under this Directive in respect of victims to whom the damage is caused. If the conditions for civil liability are met, the subsidiary could be held liable for damage that occurred, irrespective of whether the due diligence obligations were carried out by the subsidiary or by the parent company on behalf of the subsidiary.
(23) Business partners should not be obliged to disclose to a company which is complying with the obligations resulting from this Directive information that is a trade secret as defined in Directive (EU) 2016/943 of the European Parliament and of the Council (11), without prejudice to the disclosure of the identity of direct and indirect business partners, or essential information needed to identify actual or potential adverse impacts, where necessary and duly justified for the company’s compliance with due diligence obligations.
This should be without prejudice to the possibility for the business partners to protect their trade secrets through the mechanisms established in Directive (EU) 2016/943. Business partners should never be obliged to disclose classified information or other information the disclosure of which would cause a risk to the essential interests of a state’s security.
(24) Adverse human rights and environmental impacts might occur in companies’ own operations, operations of their subsidiaries and of their business partners in the chains of activities of the companies, in particular at the level of raw material sourcing and manufacturing. In order for the due diligence to have a meaningful impact, it should cover human rights and environmental adverse impacts generated throughout the majority of the life-cycle of production, distribution, transport and storage of a product or provision of services, at the level of companies’ own operations, operations of their subsidiaries and of their business partners in their chains of activities.
(25) The chain of activities should cover activities of a company’s upstream business partners related to the production of goods or the provision of services by the company, including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of the products and development of the product or the service, and activities of a company’s downstream business partners related to the distribution, transport and storage of the product, where the business partners carry out those activities for the company or on behalf of the company.
This Directive should not cover the disposal of the product. In addition, under this Directive the chain of activities should not encompass the distribution, transport, storage and disposal of a product that is subject to export control by a Member State, meaning either the export control under Regulation (EU) 2021/821 of the European Parliament and of the Council or the export control of weapons, munitions or war material under national export controls, after the export of the product is authorised.
This Directive is complemented by other legislative acts which also address negative adverse impacts in the field of human rights or environmental protection. In particular, Regulation (EU) 2021/821 sets up a regime for the control of exports, brokering, technical assistance, transit and transfer of dual-use items, covering, inter alia, software and technologies that can be used for cyber-surveillance purposes. Under this regime, Member States should consider in particular the risk of such goods being used in connection with internal repression or the commission of serious violations of human rights and international humanitarian law.
In addition, Regulation (EU) 2019/125 of the European Parliament and the Council prohibits or regulates, as the case may be, the export of goods such as chemical substances that are used or could be used for the purpose of capital punishment or for the purpose of torture or other cruel, inhuman or degrading treatment or punishment. Moreover, several other legislative initiatives are aimed at mitigating the environmental impacts of products during their whole lifecycle, including by setting ecodesign requirements based on the sustainability and circularity aspects of products.
Compliance with this Directive should facilitate compliance with the provisions and objectives of these other legislative acts, and with the terms and conditions of the applicable authorisations implemented thereunder. Exporters should take into account the results of their due diligence findings under this Directive in their compliance with those other legislative acts. The term ‘chain of activities’ as defined in this Directive is without prejudice to the terms ‘value chain’ or ‘supply chain’ as defined in or within the meaning of other Union legislation.
(26) The definition of the term ‘chain of activities’ should not include the activities of a company’s downstream business partners related to the services of the company. For regulated financial undertakings, the definition of the term ‘chain of activities’ should not include downstream business partners that receive their services and products. Therefore, as regards regulated financial undertakings, only the upstream but not the downstream part of their chains of activities should be covered by this Directive.
(27) Under this Directive, companies formed in accordance with the law of a Member State should be subject to due diligence requirements when they meet certain conditions, including turnover and, in certain cases, employee thresholds. While those conditions are expressed with regard to single financial years, this Directive should only apply if the company has met them for each of the last two consecutive financial years and should no longer apply where they cease to be met for each of the last two relevant financial years. This is also true for companies formed in accordance with the law of a third country which should fulfil the relevant Union turnover criterion for each of the last two financial years.
For the sake of clarity, and taking into account the staggered application of this Directive, the scope criteria need to be fulfilled for two consecutive financial years by both Union and third-country companies preceding the relevant application dates established in accordance with the rules on the transposition of this Directive. As regards the employee thresholds, temporary agency workers, and workers posted under Article 1(3), point (c), of Directive 96/71/EC of the European Parliament and of the Council (14) should be included in the calculation of the number of employees in the user company. Posted workers under Article 1(3), points (a) and (b), of Directive 96/71/EC should only be included in the calculation of the number of employees of the sending company.
Other workers in non-standard forms of employment should also be included in the calculation of the number of employees insofar as they meet the criteria for determining the status of worker established by the Court of Justice of the European Union (CJEU). Seasonal workers should be included in the calculation of the number of employees proportionally to the number of months that they are employed for.
The calculation of the thresholds provided for in this Directive should include the number of employees and the turnover of a company’s branches, which are places of business, other than the head office, that are legally dependent on it, and therefore considered as part of the company, in accordance with Union and national law. This should also apply for the group of companies in the event the thresholds are calculated on a consolidated basis. Where not specified otherwise, the thresholds to be met in order for a company to be covered by this Directive should be understood as thresholds calculated on an individual basis.
(28) Companies established in the Union with more than 1 000 employees on average and a net worldwide turnover exceeding EUR 450 000 000 in the last financial year for which annual financial statements have been or should have been adopted, should be required to comply with the due diligence obligations provided for in this Directive.
Companies having entered into franchising or licensing agreements in the Union in return for royalties with independent third-party companies, where those agreements ensure a common identity, a common business concept and the application of uniform business methods, and where those royalties amount to more than EUR 22 500 000 in the last financial year for which annual financial statements have been or should have been adopted, and provided that the company had a net worldwide turnover of more than EUR 80 000 000 in the last financial year for which annual financial statements have been or should have been adopted should also be required to comply with the due diligence obligations provided for in this Directive.
The same applies to ultimate parent companies of groups of companies that taken together fulfil those conditions. As regards such ultimate parent companies, the obligations of this Directive should be met by the ultimate parent company or, in the event the latter has as its main activity the holding of shares in operational subsidiaries and does not engage in the taking of management, operational or financial decisions affecting the group or one or more of its subsidiaries, instead of that ultimate parent company by one operational subsidiary established in the Union, in accordance with the conditions provided for in this Directive.
(29) In order to achieve fully the objectives of this Directive addressing adverse human rights and environmental impacts with respect to companies’ operations, operations of their subsidiaries and their business partners in chains of activities of the companies, third-country companies with significant operations in the Union should also be covered. More specifically, this Directive should apply to third-country companies which generated a net turnover of at least EUR 450 000 000 in the Union in the financial year preceding the last financial year.
Companies having entered into franchising or licensing agreements in the Union in return for royalties with independent third-party companies, where those agreements ensure a common identity, a common business concept and the application of uniform business methods, and where those royalties amount to more than EUR 22 500 000 in the Union in the financial year preceding the last financial year, and provided that the company had a net turnover of more than EUR 80 000 000 in the Union in the financial year preceding the last financial year should also be required to comply with the due diligence obligations provided for in this Directive.
The same applies to ultimate parent companies of groups of companies that taken together fulfil those conditions. As regards such ultimate parent companies, the obligations of this Directive should be met by the ultimate parent company or, in the event the latter has as its main activity the holding of shares in operational subsidiaries and does not engage in the taking of management, operational or financial decisions affecting the group or one or more of its subsidiaries, instead of the ultimate parent company by one operational subsidiary established in the Union, in accordance with the conditions provided for in this Directive.
(30) For the purpose of defining the scope of application of this Directive in relation to third-country companies, the described turnover criterion should be chosen as it creates a territorial connection between the third-country companies and the Union territory. Turnover is a proxy for the effects that the activities of those companies could have on the internal market. In accordance with international law, such effects justify the application of Union law to third-country companies.
To ensure identification of the relevant turnover of companies concerned, the methods for calculating net turnover for third-country companies as laid down in Directive 2013/34/EU of the European Parliament and of the Council should be used. To ensure effective enforcement of this Directive, an employee threshold should, in turn, not be applied to determine which third-country companies fall under this Directive, as the notion of ‘employees’ retained for the purposes of this Directive is based on Union law and could not be easily transposed outside of the Union.
In the absence of a clear and consistent methodology, including in accounting frameworks, to determine the employees of third-country companies, such employee threshold would therefore create legal uncertainty and would be difficult to apply for supervisory authorities. The definition of the term ‘turnover’ should be based on Directive 2013/34/EU which has already established the methods for calculating net turnover for third-country companies, as turnover and revenue definitions are similar in international accounting frameworks.
With a view to ensuring that the supervisory authority knows which third-country companies generate the turnover in the Union required to fall within the scope of this Directive, this Directive should require that the third-country company’s authorised representative or the company itself informs a supervisory authority in the Member State where the third-country company’s authorised representative is domiciled or established and, where it is different, a supervisory authority in the Member State in which the company generated most of its net turnover in the Union in the financial year preceding the last financial year that the company is a company that falls under the scope of this Directive.
If necessary for determining in which Member State the third-country company generated most of its net turnover in the Union, the Member State should be able to request the Commission to inform the Member State about the net turnover of the third-country company generated in the Union. The Commission should set up a system to ensure such an exchange of information.
Note: This is the final text of the Corporate Sustainability Due Diligence Directive (CSDDD), published in the Official Journal of the European Union in July 2024.