Introduction
The European Union has taken pioneering steps towards sustainability, initially with the introduction of the Corporate Sustainability Reporting Directive (CSRD), and now contemplating the Corporate Sustainability Due Diligence Directive, or CSDD. The Corporate Sustainability Reporting Directive (CSRD) materialized in January 2023. The standards governing the social and environmental data that businesses must provide have been modernized and strengthened by this new directive. Now, a more comprehensive range of large companies must report on sustainability in addition to listed SMEs.
In this blog, we’ll unravel the essentials of the EU Corporate Sustainability Due Diligence Directive. We’ll shed light on its significance, how it affects businesses and their leaders, and what it holds for the future of corporate sustainability in Europe. Whether you’re a business professional, an environmental advocate, or simply curious about sustainability’s future, this is your guide to understanding the CSDD’s impact.
What is CSDD or CSDDD?
The Corporate Sustainability Due Diligence (CSDD) is a proposed directive by the European Commission to promote sustainable and ethical corporate behavior throughout global value chains. At its core, CSDD mandates companies to identify, prevent, or mitigate adverse impacts of their operations on human rights and the environment.
This includes addressing issues such as child labor, exploitation of workers, pollution, and biodiversity loss. The directive seeks to standardize due diligence practices, providing legal clarity for businesses and enhanced transparency for consumers and investors. Ultimately, CSDD aspires to bolster the green transition and protect human rights in Europe and globally.
Who Has Obligations Under CSDD?
The Corporate Sustainability Due Diligence (CSDD) directive sets specific requirements for certain businesses and their leadership. Here’s a breakdown of the entities and their corresponding obligations:
1. Large EU-Based Companies
Companies with over 500 employees, casting a net worldwide turnover exceeding EUR 150 million.
Obligations:
- Recognize and address adverse human rights and environmental impacts in their operations and value chains.
- Integrate due diligence into corporate policies.
- Establish and maintain a grievance mechanism.
- Publicly report on due diligence measures.
2. EU Companies in High-Impact Sectors
Firms need to meet the above criteria but with 250+ employees and a net global turnover of at least EUR 40 million.
Obligations:
Similar to large EU-based companies, these businesses are required to identify, address, and report on sustainability challenges, but they might have a phased or extended timeline for implementation.
3. Non-EU Companies with Significant EU Operations
Non-EU entities that match the turnover thresholds set for EU firms and generate over EUR 150 million turnover within Europe, or a high impact sector with more than EUR 40 million turnover within the EU.
Obligations:
Please comply with the due diligence requirements when operating within the EU, ensuring that their business practices align with the region’s sustainability standards.
4. Directors of EU Companies
Key decision-makers and leaders responsible for guiding and overseeing company operations and strategies.
Obligations:
- Ensure the implementation of due diligence measures.
- Integrate these measures into corporate strategy and day-to-day activity.
- Consider the effects of human rights and climate change, both in the short and long term, when fulfilling their duty towards their company.
Exclusions: Small and medium enterprises (SMEs) aren’t directly obligated, but they may still face indirect pressures if they are part of the value chain of larger companies covered by the CSDD.
In essence, the CSDD aims to ensure that impactful businesses and their leaders, regardless of their origin but based on their operations within the EU, adopt responsible practices prioritizing human rights and environmental sustainability.
Annex to the CSDD Directive: Key Violations
The Corporate Sustainability Due Diligence (CSDD) directive, proposed by the European Parliament and the Council, addresses critical violations underpinning corporate sustainability. These violations align with established international agreements and conventions:
Violations of Rights in International Human Rights Agreements:
The directive identifies certain breaches that go against internationally agreed-upon human rights. Specific violations under this category will reference relevant international human rights agreements.
Human Rights and Fundamental Freedoms Conventions:
Apart from broad human rights, the directive pinpoints violations that contravene specific conventions on human rights and fundamental freedoms. The detailed infringements will draw from conventions that address these more specific rights and freedoms.
Violations Related to Environmental Conventions:
Recognizing the importance of environmental protection, the directive categorizes breaches that oppose internationally recognized objectives and prohibitions set in ecological conventions. Specific violations will depend on global environmental conventions and their goals.
This annex aims to clarify the types of violations the CSDD directive addresses, ensuring corporations adhere to a high standard of sustainability practices that align with international norms.
Requirements of the CSDD: Building a Sustainable Business Future
The CSDD establishes rigorous standards for businesses to ensure environmental and human rights sustainability. The directive primarily revolves around five pivotal components.
Due Diligence: Identifying and Preventing Risks
Companies are mandated to actively identify and prevent ESG risks related to both the environment and societal impact. This involves:
- Assessing the repercussions of business operations on the environment, supply chain, and fundamental human rights.
- Analyzing supplier operations, ensuring fair treatment of workers, and adherence to safety regulations.
Risk Management: Proactive Addressing of Concerns
To build sustainability, it’s crucial to identify risks and mitigate them. This might entail:
- Formulating and revising policies for better risk identification.
- Collaborating with suppliers to address and resolve issues at their root.
Transparency: Open Reporting & Sharing
Transparency fosters trust. Under the CSDD:
- Companies must be open about their due diligence processes.
- Whether through annual reports or company websites, public availability of sustainability reports or related information is necessary.
Effective Internal Communication
Open communication within the organization needs to be addressed. To facilitate this, companies can:
- Establish dedicated channels (like hotlines or emails) for reporting concerns or misconduct.
- Strengthen HR systems to handle and address internal concerns.
Third-Party and Supplier Oversight
The role of third parties and suppliers should be considered regarding potential risks. Ensuring their adherence to CSDD standards involves:
- On-site visits to validate operations, safety standards, and treatment of workers.
- Continual reviews of supplier policies, ensuring they align with sustainability goals.
- Keeping abreast of regulatory changes, ensuring all suppliers remain compliant.
- Vigilant oversight of internal management practices to reduce potential risks.
By adhering to the CSDD requirements, companies ensure regulatory compliance and embark on a journey towards holistic sustainability, emphasizing the planet’s and its inhabitants’ well-being.
CSDD Compliance and Enforcement: Why It Matters to All Companies
The Corporate Sustainability Due Diligence Directive (CSDD) brings specific criteria and enforcement mechanisms. Yet, its essence resonates beyond the companies it directly governs.
Enforcement Mechanisms
1. Administrative Supervision and Sanctions:
In the implementation of the directive, Member States will first designate an overseeing authority responsible for enforcing sanctions, ranging from fines to compliance orders. A European Network of Supervisory Authorities will be established to ensure a unified approach, where the Commission unites representatives from national authorities. Moreover, individuals and entities can submit substantiated concerns about a company’s non-compliance.
2. Civil Liability:
If companies don’t adhere to their due diligence responsibilities, victims can seek compensation for damages in Member States.
3. Financial Incentives:
Directors of EU companies will have their variable remuneration linked to how well they implement emission reduction plans, ensuring a financial stake in compliance.
Why Every Company Should Heed the CSDD Principles
1. Evolving Consumer Expectations:
As consumers place a growing emphasis on ethical standards, embracing CSDD principles, even in the absence of mandates, can cultivate brand loyalty.
2. Reputation Management:
Commitment to ethical and environmental standards can bolster a company’s public image, attracting stakeholders.
3. Proactive Risk Management:
Addressing potential risks related to sustainability and human rights can ward off possible legal or supply chain complications.
4. Attracting Investments:
Investors favor businesses practicing good ESG (Environmental, Social, and Governance) standards.
5. Future-Proofing the Business:
Embracing CSDD’s core principles today can simplify compliance with future regulations.
6. Upholding Ethical Responsibility:
Even outside the scope of CSDD, every company has a moral obligation towards stakeholders and society.
While the CSDD has precise enforcement mechanisms and criteria, its principles remain significant for all businesses. Adopting its ethos ensures legal compliance and positions a company as responsible and future-ready in the evolving business landscape.
Timeline/Roadmap of the Corporate Sustainability Due Diligence Directive Development
February 2020:
Commissioned Study: A detailed study on the supply chain’s due diligence requirements, laying the groundwork for future proposals.
July 2020:
Commissioned Study: A study focused on directors’ duties and sustainable corporate governance that gathers more evidence and insights for the forthcoming proposal.
October 2020:
Public Consultation Launch: The European Commission consulted on the sustainable corporate governance initiative. This step is crucial for gathering feedback, insights, and public opinion on the proposed measures.
December 2020:
Council’s Conclusion: The Council, in its conclusions, urges open to the public the Commission to present a proposal for an EU legal framework focusing on sustainable corporate governance. This framework would encompass cross-sector corporate due diligence across global value chains, emphasizing the importance of ensuring sustainability throughout the supply chain.
March 2021:
European Parliament’s Call: The European Parliament has officially called upon the Commission to present a legislative proposal that addresses mandatory value chain due diligence. This represents a substantial stride forward, highlighting the Parliament’s dedication to fostering sustainable and ethical corporate conduct.
February 2022:
Commission’s Response: The European Commission adopts the corporate sustainability due diligence Directive proposal. This proposal directly responds to the earlier calls from the European Parliament and the Council. It has been crafted considering the feedback from the public consultation and the evidence from the commissioned studies.
December 2022:
European Council’s Stance: Proposed limiting the directive’s scope to larger EU companies with over 1,000 employees, EUR 300m turnover, and equivalent non-EU firms within the EU. The Council diverged from tying due diligence to director duties and removed sustainability-linked remuneration. Meanwhile, MEPs appear to favor a broader approach.
2023 (Expected):
The CSDDD is projected to enter trilogue discussions later in the year, with different EU institutions attempting to reach a consensus.
The Future Implications of CSDD
The Corporate Sustainability Due Diligence Directive (CSDD) brings profound implications across various European and global landscape facets. Here’s a look at some potential impacts from different perspectives:
Business Perspective:
Operational Adjustments: Companies must overhaul their due diligence processes, focusing on their actions’ environmental and societal implications.
Financial Implications: While initial adjustments to operations might incur costs, in the long run, sustainable operations can lead to cost savings, especially with potential penalties for non-compliance.
Supply Chain Scrutiny: Businesses must scrutinize their entire supply chain, potentially favoring suppliers that adhere to sustainable practices.
Reputation and Branding: Companies adhering to CSDD can bolster their brand image, while those failing to comply risk reputational damage.
Environmental Perspective:
Reduction in Environmental Harm: With a focus on environmental due diligence, there could be significant reductions in practices that harm the environment.
Climate Change Mitigation: By holding companies accountable for their environmental footprint, the directive indirectly promotes actions that combat climate change.
Biodiversity Conservation: Some discussions around CSDD hint at broadening its scope to include obligations related to nature and biodiversity, leading to more conservation initiatives.
Societal Perspective:
Human Rights Protection: CSDD mandates businesses to ensure their operations don’t infringe upon human rights, leading to better working conditions and fair treatment worldwide.
Community Empowerment: Communities, especially those around business operations, can have more voice and say in activities directly affecting them.
Transparency for Consumers: With businesses required to report on their sustainability efforts, consumers can make informed decisions, supporting companies that align with their values.
Broader Implications:
Setting a Global Precedent: The CSDD could act as a model for other regions, setting a global standard for corporate sustainability due diligence.
Innovation and Research: As companies strive to meet CSDD standards, there might be a surge in research and innovation, especially in sustainable technologies and practices.
While the CSDD poses immediate business challenges, it promises a more sustainable, transparent, and equitable corporate landscape.
Conclusion
The Corporate Sustainability Due Diligence Directive (CSDD) marks a pivotal moment in European corporate responsibility. Since its introduction by the Commission in February 2022, there’s been significant debate on its scope and mechanisms. While the European Council in December 2022 proposed limiting the directive to larger EU companies, members of the European Parliament appear keen to widen its ambit. Additionally, disagreements have arisen concerning the involvement of directors in due diligence and the connection between their remuneration and sustainability.
As the CSDD progresses towards trialogue negotiations in 2023, an anticipated adoption by 2024, and potential implementation by 2025, its final shape remains a focal point of interest. What remains unequivocal is the directive’s aim: promoting a transparent, accountable, and sustainable corporate landscape in Europe.
