Big changes for big business: a new era of sustainability for 13,000 European companies

Historical Context and Current Challenges

For Czech exporters who already comply with the German Act on Corporate Due Diligence Obligations in Supply Chains (LkSG), the CSDD Directive represents another step towards the harmonization of standards at the EU level. This process not only highlights the importance of complying with existing German requirements, but also points to the need to prepare for upcoming pan-European regulations. This, among other things, emphasizes the key importance of Germany as a market and at the same time the necessity of adapting to the European legislative landscape in the field of sustainability and human rights protection.

Inspiration and Approach of the Directive

The CSDD Directive, inspired by the French law of 2017, extends the concept of corporate responsibility to a broader European context. Following the amendment by Directive (EU) 2026/470, it targets companies with more than 5,000 employees and a worldwide net turnover exceeding EUR 1.5 billion. 

These requirements are cumulative, meaning that a company must meet both criteria (number of employees and turnover) in the given category for the requirements of the directive to apply to it. This regulation, which does not include small and medium-sized enterprises, affects a total of 13,000 of the largest companies in the EU as well as 4,000 companies outside the European Union.

The inclusion of non-EU companies stems from the need to ensure that all products and services available on the European market meet the established standards of human rights and environmental protection, regardless of their place of origin. In this way, the CSDD Directive promotes sustainable and ethical production and trade on a global scale, extending beyond EU borders to businesses whose activities have a direct impact on the European market.

Key Requirements and Impacts

The CSDD Directive requires companies to implement comprehensive due diligence processes to identify and address potential human rights violations. This means actively identifying risks and ensuring that production does not cause harm to human rights or the environment. Although the CSDD Directive does not directly specify concrete sanctions, it is expected that EU member states, including the Czech Republic, will establish effective, proportionate, and dissuasive sanctions in accordance with this framework. This opens up space for inspiration from the aforementioned German LkSG law, which is an example with potential sanctions of up to EUR 800,000 or 2% of annual turnover, including the possibility of exclusion from subsidies and public procurement for up to 3 years. 

The detailed organization of supervision and sanctioning at the national level will have to be specified by member states as part of the implementation of the directive into their legal systems, ensuring that every state, including the Czech Republic, will have a clearly designated national authority responsible for monitoring and imposing potential sanctions.

Similar sanctions to those envisaged by the German Supply Chain Act could also be introduced in the Czech Republic. This stems from the obligation of EU member states to establish effective, proportionate, and dissuasive sanctions as part of the implementation of the CSDD Directive. The CSDD Directive entered into force on July 25, 2024; following the postponement and the Omnibus I amendment, the obligations are to be applied from July 26, 2029, from which time Czech companies can expect the necessity of full compliance with the requirements of the directive.

This directive is thus another legal instrument tightening the civil liability of companies. This not only expands corporate liability but also increases pressure on their ethical behavior, as it introduces a novelty to the Czech environment, namely a direct liability relationship between companies and individuals whose rights may be affected by the company's activities, which will arise directly from violations of the directive's standards. This step represents a significant change that requires companies not only to comply with public regulations but also to take into account a potential direct claim for damages by the affected persons.

Global Impact and Appeal

The CSDD Directive has the potential to change global practice in human rights protection, although conducting extensive due diligence in complex supply chains presents a challenge. Its implementation highlights the need for a global approach to human rights protection and sustainable business, requiring active participation and adaptation from all companies involved.

It will undoubtedly be necessary for Czech companies to prepare for this change in time and already start thinking about how to most effectively address active prevention in relation to the issues covered by the CSDD Directive, also with the necessary expert legal support from our Prague-based legal team, so as to comply with all requirements of both the directive and the subsequent legislation under which the directive will be implemented under Czech legislation.