The EU’s Corporate Sustainability Due Diligence Directive

The proposed Corporate Sustainability Due Diligence Directive (CSDDD) sets a rigorous standard for human rights and environmental due diligence for companies operating in the European Union (EU). If implemented (adoption expected April 2024), companies will be obliged to reduce their negative impacts on human rights and the environment. Companies who put in place due diligence systems will be well-placed to meet other compliance obligations and capture broader business performance benefits. 

The main goal of the proposed CSDDD is to mandate companies operating within the EU to practice human rights and environmental due diligence. The directive aims to promote greater protection of human rights and the environment, while also minimizing negative impacts on global value chains. 

By implementing a unified approach across the EU, the directive intends to provide businesses, customers, and victims with more clarity about expected behavior and potential liability. 

To comply with the directive, companies need to integrate responsible business practices into their daily operations, actively identifying and addressing risks on human rights and the environment. Due diligence is required in relation to companies’ own operations, subsidiaries, and business partners (taking a value chain approach), regardless of whether the impacts occur within or outside of the European Union.

The CSDDD offers comprehensive requirements for due diligence, with a risk-based approach, that are aligned with well-recognized international frameworks such as the OECD Guidelines for Multinational Enterprises (OECD Guidelines) and the UN Guiding Principles on Business and Human Rights (UNGPs). Companies are required to: 

• Embed responsible business conduct into policies and management systems 

• Identify, assess and prioritize actual or potential adverse impacts on human rights or the environment

• Prevent, mitigate, or bring to an end adverse impacts and provide remediation where necessary

• Meaningfully engage with stakeholders and implement robust complaint mechanisms 

• Monitor the effectiveness of measures taken and communicate publicly on due diligence. 

Alongside these due diligence requirements, the CSDDD requires companies to adopt and implement a climate transition plan that is in line with the Paris Agreement. 

The proposal captures the following companies. 

• Group one: EU companies with more than 1000 employees and a net worldwide turnover of more than EUR 450 million. Parent companies of a group that reach these thresholds are also in scope. 

• Group two: Non-EU companies with a net turnover in the EU of more than EUR 450 million. Parent companies of a group that reache the threshold are also in scope. 

• Group three: EU companies that have franchising or licensing agreements with a return of more than EUR 22.5 million in royalties and a net worldwide turnover of more than EUR 80 million

• Group four: Non-EU companies that have franchising or licensing agreements with a return of more than EUR 22.5 million in royalties and a net turnover in the EU of more than EUR 80 million

Note: the directive will only apply if a company meets all thresholds for two consecutive financial years, and if a company meets all listed thresholds for the group (e.g. both employee and turnover where relevant)

SMEs are not directly in scope, but they could be affected in their capacity as contractors or subcontractors to any of the above companies.

Each Member State will designate a national authority to oversee the implementation of the CSDDD and company compliance. The national authorities will be responsible to ensure that victims of adverse impacts have effective access to justice and compensation, and they will have the power to request information and carry out investigations. Where necessary, liability measures may be enacted in response to non-compliance by companies, including:

• Administrative sanctions: determine effective, proportionate, and dissuasive sanctions, including financial sanctions based on the company turnover and up to 5% of the company net turnover.

• Civil liability: Member States are responsible for setting up mechanisms to enable victims to trigger civil liability in case of damages to compensate for harm caused. Individuals, trade unions and civil society organizations will be able to bring in-scope companies to court for adverse impacts for a period of at least 5 years. The agreement will limit the disclosure of evidence and the costs of proceedings for claimants. 

• Government procurement: Compliance with the Directive may be used as a criterion for the award of public contracts and concessions, therefore impacting in-scope companies’ ability to participate in government procurement.

On 15 March, the EU Council voted to support the CSDDD. The successful vote comes after a series of delays and concessions in the text, due to mixed support from member states on an earlier draft agreement. Thankfully, the EU is now back on track with a compromised version of the text, which will face a final vote in the EU Parliament, scheduled to take place in April. 

After adoption Member states will have two years to transpose the directive into national law (2024-2026). These adopted and published provisions will start to apply to companies in the following year and companies will have to comply 3-5 years after their entry into force in 2024, depending on the size of the company. 

The Directive would come into force in 2026 at the earliest, but given the transformation needed to implement human rights and environmental due diligence across business functions and across value chains, companies should start preparing now. One of the strengths of the CSDDD is that it broadly aligns with internationally recognized guidelines. Wherever your company is on its due diligence journey, a great place to start is to work with the existing voluntary frameworks that the CSDDD references, such as the OECD Due Diligence Guidance for Responsible Business Conduct and the United Nations Guiding Principles on Business and Human Rights (UNGPs). These frameworks can be taken as guidance on how to conduct due diligence throughout the company’s chain of activities. An efficient starting point for companies is to determine how some of their current practices could be enhanced to bolster the effectiveness of their current due diligence process.

Key steps for companies to start preparing include:

• Bringing transparency to their value chain

• Identifying the human rights and environmental risk exposure of their value chain steps

• Assessing their policy landscape

• Mapping their current due diligence systems, human rights and environmental risk management practices & accountabilities

These actions are relevant for compliance and will unlock additional business benefits. By taking these steps, companies will kick-off the journey towards identifying, addressing and mitigating potential adverse impacts, while at the same time while fostering trust with their stakeholders, engendering investor confidence, and benefitting business performance in the long term.