The right to a healthy environment and the right to the future has gained significant attention all around the globe. With global temperatures rising, people’s concerns for their future are starting to intensify due to the frequent reports of climate catastrophes, extreme temperatures, and wildfires. According to the EU’s news, the number of temperature-related deaths is going to occur more frequently (9.3 times more in the north of Europe). The current data show, that annually, there are more than 400,000 deaths occurring due to extreme temperatures (high or low). During the summer, one can experience severe wildfires not only in deserted areas, or far from Europe like in South America or Africa, but also in European countries, like Greece, Croatia, and most recently in Madeira, Portugal. In Portugal, the Directorate-General for European Civil Protection and Humanitarian Aid Operations (ECHO) had to mobilize aid for the country and provide assistance for this natural disaster. This article serves as an introduction to the issue and introduces the European Union’s new tool to establish a sustainability due diligence process and its scope, potential costs, transposition, and application.

In my previous blog posts, I reported on youth climate litigations in the United States and also the actions of the Klimaseniorinnen against Switzerland on the ECtHR. In these climate litigations, the right to a healthy environment was acknowledged on a constitutional level, and this fundamental right was finally filled with some content and was concretized from the abstract level. According to the European Union’s assessment, several stakeholders (such as civil societies, citizens of the European Union, and even businesses) expressed their concern regarding climate change and sustainability issues. According to the EU public consultation’s results, more than two-thirds (approximately 70%) of businesses expressed the need and the wish for a corporate sustainability due diligence procedure to be established EU-wide.

This year, the European institutions took a step forward and submitted the Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859. On 25 July 2024, the abovementioned Directive (also called the CSDDD—Corporate Sustainability Due Diligence Directive) entered into force, and with that, a new generation of human rights arose. These new actions intend to regulate companies and their corporate behavior in their operations and their value chains.

The new rules lay down the obligation to establish a corporate due diligence duty to address adverse human rights and environmental impacts (potential and actual) within their own operations, supply chains, and partners. Article 1 already refers to the 2015 Paris Agreement and emphasizes its target to mitigate climate change with the climate neutrality objective 2050 and the European Climate Law targets as well.

One could ask, why these for-profit entities have such a wish to burden themselves with additional due diligence obligations which can incur severe costs such as the costs of establishing and operating the due diligence process itself or other transitions costs like expenditure and investments to adapt their operations and even their value chains. As unlikely as it seems, companies could also win from a harmonized, tighter regulation by receiving better access to financing through their improved Environmental, Social, and Governance (ESG) scores or have better risk management by clearing their supply chains from adverse elements such as companies that operate unsustainably and with that endangering the smooth operations and even the marketing of the company, even with the possibility of losing customer trust and employee commitment.

The scope of the directive applies to companies in a Member State that fulfill the criteria of having more than 1,000 employees on average with a net worldwide turnover of more than 450,000,000 Euros in the preceding financial year. If the previous condition is not met, the company may still fall under the scope of the directive by meeting either of the following two required conditions. The first one is that if the company has an ultimate parent in a group that reaches the thresholds mentioned in the previous condition (1,000 employees and EUR 450,000,000 worldwide turnover for the last financial year of the consolidated statements). The second is if the company or its ultimate parent company entered into a franchising or licensing agreement within the Union (for royalty payments with third-party enterprises). In this case, the royalties in the franchising or the licensing agreement must amount to more than EUR 22,500,000 in the preceding financial year to be subject to the rules of the directive.

In Article 2, the scope is also applied to companies residing outside of the European Union’s territory but are large enough to have a significant impact within the European Union. In this case, companies with a turnover exceeding EUR 450,000,000 in the European Union still fall under the scope of the directive’s rules. The main purpose of the regulation is similar to the Digital Services Act’s perspective to regulate larger enterprises and companies, called VLOPs, having a significant impact. In the case of this new directive, the scope normally does not refer to small and middle-sized enterprises (SMEs) but they can also be affected and fall under the scope of the rules of the directive by being part of the supply and values chain of the company falling under its scope (usually by being long-term business partners, suppliers, etc…). The number of indirectly affected SMEs is hardly impossible to assess but the large European Union-based limited liability companies (LLCs) and partnerships and mentioned large non-European Union-based companies amount to approximately 7,000 companies that fall under the scope of the rules of the new directive.

The Directive serves as a base for transposition into national legislation. Member States have an obligation to inform the European Commission by 26 July 2026 (2 years after entering into force) about the completion of this transposition. The application of these national laws will be enforced starting from one year after the transposition into national law (latest on 27 July 2027). The European Union, as could be seen in recent rules and regulations, applies a staggered approach where the full application is going to be reached from 26 July 2029 onward (Article 37).

The new CSDDD has brought a change within the European Union’s approach to corporate sustainability. Furthermore, also a pattern of EU targets could be observed by having a similar company base within the affected entities of its scope. With that, the EU tries to keep the large companies on a tighter leash. However, the practice of regulating large companies tighter brings up the question of how it will affect the EU’s competitiveness and foreign direct investments as it has been a serious issue within the EU. As the article of Árpád Lapu regarding the problem of European Competitiveness also highlighted, the European Union is falling behind due to over-regulation of the markets and companies. With that practice, countries like China or the US receive significant economic advantages as EU companies’ competitiveness suffers due to heavy regulatory burdens which also affect their cost structures inherently.

Dorina BOSITS is a law student at the Széchenyi István University of Győr, Hungary, and an international finance and accounting graduate of the University of Applied Sciences of Wiener Neustadt, Austria. She is currently an exchange student at Karl Franzes University of Graz, Austria. The main area of her research includes freedom of speech, digitalization, space law, data protection, and financial law. She is a student at the Law School of MCC and a member of ELSA Győr.