The European Union has been at the forefront of promoting sustainable and responsible business practices. In this context, the Corporate Sustainability Due Diligence Directive (CSDDD) stands out as a landmark initiative. The directive aims to foster sustainable and responsible corporate behaviour throughout global supply chains, ensuring that businesses actively contribute to sustainable development. By mandating due diligence practices, it seeks to minimise the adverse impacts of business operations on human rights and the environment.
Applicability of CSDDD
The CSDDD applies to large companies operating within the EU, including those headquartered outside but doing significant business within the union. It targets companies with a substantial turnover, reflecting their considerable influence on global supply chains and operational standards. Specifically, it targets:
- Large EU companies: Defined as those having more than 500 employees and a net worldwide turnover of more than EUR 150 million.
- Non-EU companies: The obligations will apply to companies if they generate a net turnover of more than EUR 150 million in the EU three years after the directive comes into force.
- High-risk sectors: The obligations will also apply to companies with over 250 employees and with a net turnover of more than EUR 40 million if at least 20 million are generated in a high-risk sector. High-risk sectors are classified as such sectors, which will pose a possible threat for human rights and the environment.
Companies, which provide financial services, will temporarily be excluded from the directive.
Main requirements of CSDDD
The CSDDD lays down several key obligations for companies:
Due diligence obligations
At its core, the directive establishes a comprehensive due diligence duty. Companies must identify, prevent, mitigate, and account for potential and actual impacts on human rights and the environment in their operations and value chains. This includes thorough risk assessments and implementing effective action plans. Large companies, including financial sector companies, will also have to adopt a plan ensuring their business model complies with limiting global warming to 1.5°C.
Transparency and reporting
Regular and detailed reporting on due diligence strategies, actions, and outcomes is mandatory. Companies must be transparent about their sustainability practices, offering stakeholders clear insights into their operational impacts. This increases transparency and accountability.
Accountability and liability
Companies are held accountable for their actions and the impacts of their supply chains. This could include legal liability for harm caused by their failure to conduct adequate due diligence. Companies failing to adhere to the standards may face legal and financial repercussions, emphasising the importance of diligent implementation.
Sanctions and supervision
Each EU country will designate a supervisory authority to monitor whether firms are complying with these obligations. They will be able to launch inspections and investigations and impose penalties on non-compliant companies, including "naming and shaming" and fines up to five percent of their net worldwide turnover.
Stakeholder engagement and grievance mechanisms
Engaging with stakeholders, including affected communities, and establishing grievance mechanisms for remediation of adverse impacts are critical components.
The Proposal for the CSDDD was first published by the European Commission on February 23, 2022. On December 1, 2022, the European Council adopted its own negotiating position, or "General Approach" to the proposal and in June 2023, the European Parliament adopted the CSDDD as a negotiating text. In the "Trialogue" negotiations a provisional agreement has been reached by the end of 2023, which now needs to be endorsed and formally adopted, which is expected to be concluded by 2024. Once officially adopted, the directive will be transposed into domestic laws within two years by EU member states.
The timeline for implementation of the CSDDD then is phased. Large companies are expected to comply within two years of the directive's adoption. For smaller companies falling under its scope, an additional transition period is provided, usually an extra year.
The CSDDD represents a significant step by the EU to integrate sustainability into the core of corporate operations. It emphasises the need for transparency, accountability, and active engagement in addressing environmental and human rights issues. By enforcing such measures, the EU aims to set a global benchmar.k for sustainable business practices.
Companies must recognise the operational and strategic impacts of this directive and begin preparations for compliance immediately.
This directive is part of a broader legislative trend focusing on corporate sustainability. Businesses should anticipate and adapt to these evolving standards, leading the way in sustainable practices.
For more information or to discuss any of the points raised in this article contact Melissa Bach.