In line with green transition in the EU, fresh policy proposals are making their way forward. One of them, the CSDDD/CS3D – if adopted – requires serious steps to be taken by companies. Obligations regarding corporate sustainability due diligence along the full value chain are to be expected.

The directive aims to make large companies responsible for environmental and human rights violations that occur along their value chains. Thus, companies are mandated to identify and address impacts on human rights and the environment, integrating due diligence into their operational strategies. Company directors are tasked with overseeing due diligence implementation and incentivized to contribute to climate change mitigation. Negotiations between the European Parliament and the Council are currently taking place, and so far, the following provisions are to be reckoned with:

1. Scope of application: All EU-based companies, regardless of their sector, including financial services, with more than 250 employees and a worldwide turnover over €40 million as well as to parent companies with over 500 employees and a worldwide turnover of more than €150 million. Non-EU companies with a turnover higher than €150 million, if at least €40 million was generated in the EU, will be included.
2. Integration of due diligence: Companies should integrate specific due diligence processes into their corporate policies, identify and minimize adverse impacts on human rights, the environment and good governance; establish out-of-court handling of complaints.
3. Prevention of potential negative impacts: Companies are required to establish contractual arrangements with partners with whom the company has a business relationship; adapting business models and strategies, to prevent potential adverse impacts.
4. Mitigating actual negative impacts: Companies should take steps to remedy any adverse impact and any harm it has caused to people or the environment.
5. Guidelines: The Commission will issue clear and easily understandable guidelines, to facilitate compliance in a practical manner. Member States should designate national helpdesks.
6. Combating climate change: Companies should implement a transition plan to limit global warming to 1.5°C. Companies with more than 1,000 employees should have an effective policy to align with that goal and that any variable remuneration for directors is linked to the company’s transition plan.
7. Sanctions: Non-compliant companies will be liable for damages and will be sanctioned. Sanctions include measures such as “naming and shaming”, taking a company’s goods off the market, or fines up to 5% of the net worldwide turnover.

When accepted, the Directive will likely affect the whole framework of the corporate regulation currently in effect in Hungary, such as the Act XLIII of 2021 on financial and other service providers.

Given the time-consuming nature of full compliance with the rules, it is recommended that operators do due diligence and run a series of pre-compliance activities (as it was the case with the GDPR a couple of years ago). As a start, we suggest that economic operators examine their readiness for the coming changes by using the following check list:

1. Do you, as a business entity, have a full understanding of the scope, content, and possible sanctions of the proposed law?
2. Do your business fall under the scope of application of the CSDDD?
3. Does your due diligence integrate adverse impact on human rights and environment all along the value chain?
4. Do you have an implemented transition plan and is the directors’ renumeration linked to it?

At Dentons Budapest, we are following closely the developments of the law and are available to assist clients in their needs.