Malta Update: Corporate Accountability Redefined: Insights into the New Corporate Sustainability Due Diligence Directive

The EU has built a robust legislative framework to aid its transition into a low carbon economy. A recent addition is the Directive on corporate sustainability due diligence (“CSDDD” or “Directive”). The CSDDD aims to foster sustainable and responsible corporate behavior throughout global value chains.

When has this come into effect?

On 25 July 2024, this Directive entered into force. Member States will have 2 years to transpose the CSDDD, with a gradual phase-in process kicking off a year later, to last approximately 3-5 years.

Who does it apply to?

The CSDDD applies to both EU and non-EU companies and their parent companies.

EU Companies:
1. Having more than 1,000 employees and with an annual net global turnover of more than €450 million (or ultimate parent companies of such a corporate group); and
2. Franchises with a global turnover of more than €80 million (or ultimate parent companies of such a corporate group) if at least €22.5 million was generated by royalties.

Non-EU Companies:
1. Having an annual net turnover of more than €450 million in the EU (or ultimate parent companies of such a corporate group); and
2. Franchises with a turnover in the EU of more than €80 million (or ultimate parent companies of such a corporate group) if royalties generated at least €22.5 million was generated by royalties.

Non-EU companies need to designate an authorised representative based in the Member State in which they operate, who will communicate with supervisory authorities about due diligence compliance on their behalf.

SMEs and micro companies1 are not covered by these rules. However, the CSDDD provides support and protective measures for the SMEs which could be affected when they form part of value chains.

What are the main obligations?

• Companies will be required to identify and where needed, prevent, end or mitigate adverse impacts of their activities on human rights and on the environment.
• Directors will have the duty to set up and oversee the implementation of due diligence and to integrate it into corporate strategy.
• Companies will have to incorporate sustainability due diligence both in their policies and as part of their risk management systems.
• Introduction of civil liability – there will be a period of 5 years when affected individuals can bring claims against adverse effects caused by unsustainable practices of companies subjected to these requirements.
• Companies to put in place a transition plan on a best-efforts basis, to align their business model with the 2050 climate neutrality objective of the Paris Agreement. This transition plan is to consist of a) target deadlines to act against climate change, b) main actions the company will take to reach them and c) a detailed explanation of what investments are necessary to implement this plan.
• Companies are also to put in place complaints mechanisms, which will allow them to communicate with communities directly affected by their actions.

Conclusion

Notably, it is the businesses themselves that are to foot the entire bill for costs of this due diligence process and costs incurred during the transition process that ensures compliance with such requirements. However, it is natural to speculate if and how such costs will be recouped and whether these will trickle down the value chain, specifically effecting small players and the consumer.

For bigger corporations, but also indirectly smaller stakeholders down the value chain, it is only a matter of time until they need to open up their doors and embrace these incoming changes and move towards a more sustainable and responsible corporate behaviour.

By Fenech Farrugia Fiott Legal, Malta, a Transatlantic Law International Affiliated Firm.  

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