EU Council Reaches Compromise on the CSDDD

New version of the CSDDD is back on track

The proposed CSDDD regulation is back on track after complex negotiations

On April 24, the EU Parliament approved the adoption of the Corporate Sustainability Due Diligence Directive (CSDDD). The EU is now making excellent progress in establishing clear obligations that require large companies to integrate human rights and environmental due diligence into their day-to-day operations. The approved version of the CSDDD is a compromise compared to the earlier draft that failed to pass a vote in February. Still, companies will be obliged to take proactive measures to identify and address any negative impacts on human rights and the environment throughout their chain of activities.

The Corporate Sustainability Due Diligence Directive aims to promote sustainable and responsible corporate behavior by requiring companies that wish to operate in the EU to conduct human rights and environmental due diligence. This will lead to a better protection of human rights and the environment, and to fewer adverse impacts across global value chains.

By implementing a unified approach across the EU, the directive aims to enhance transparency for companies, customers, and potential victims of harm with respect to expected conduct and liability.

To comply with the directive, companies need to integrate responsible business practices into their daily operations in order to actively identify and address risks on human rights and the environment. Companies must exercise due diligence in relation to their own operations, those of their subsidiaries, and their direct and indirect business partners throughout their chains of activities – otherwise understood as a ‘value chain approach’. This applies regardless of whether impacts occur within or outside 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 and the UN Guiding Principles on Business and Human Rights (UNGPs). Companies will be 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;
engage meaningfully 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 compromise involves significant concessions to the scope of the directive, but the long-term goal remains unchanged

Compared to earlier drafts of the CSDDD, the latest agreement requires higher thresholds, in terms of employee numbers and turnover, for companies to be in scope. Additionally, the directive no longer includes separate provisions, with lower thresholds, for companies operating in high-impact sectors, such as textiles, agriculture, and the extraction of minerals. Also, the scope of downstream value chain activities has been reduced. It is now expected that approximately 5,300 companies will be in scope for this directive.

Despite the concessions made to reach an agreement, the long-term goal of value chain due diligence remains unchanged. Regardless of whether your company is in scope for CSDDD or not, the trend toward mandatory human rights and environmental due diligence is clear.

The business case for value chain due diligence is strong, regardless of whether a company is in scope for the CSDDD

Value of holistic ESG commitments and strategy: Integrating a holistic approach to ESG into company policies and management systems is the first step of due diligence. By encouraging a company-wide culture of sustainability and responsibility, the shared ownership of the company's ESG commitments and strategy can unite all functions and levels under a common goal. This cross-company commitment to ESG will enable businesses to navigate complexities of global value chains and global political and economic turbulence with a clear long-term vision for the future.
Value of improved risk management: Proactive due diligence processes enable companies to identify and mitigate risks associated with human rights violations, environmental degradation, and unethical business practices. Mitigating these risks is essential to avoid regulatory fines and penalties, avoid reputational damage and associated boycotts and divestments, and avoid market access restriction.
Value of transparency: Businesses can foster trust and loyalty with stakeholders and customers by transparently tracking and communicating their impact on human rights and environment. This transparency improves their reputation both externally and internally and can enhance employer attractiveness for generations to come.
Value of robust value chain data management: Due diligence requires accurate and efficient data collection and analysis across global value chains, with the support of digital tools. By putting in place the necessary data management systems, companies can facilitate reporting needs and ease compliance with non-financial reporting regulations, including the CSRD. Increased availability of data can also be used to support other business goals, such as supply chain optimization.

Robust due diligence enables simultaneous compliance with multiple regulations

The CSDDD is part of a wider EU Green Deal, including other emerging ESG-related regulations, including the Corporate Sustainability Reporting Directive (CSRD), the EU Deforestation Regulation (EUDR), and the EU Taxonomy Regulation, aimed at promoting responsible business practices for companies operating in the EU. An efficient way for companies to prepare for compliance to multiple regulations all at once, is to use the international standards that the CSDDD is aligned with; in particular, the United Nations Guiding Principles on Business and Human Rights (UNGPs) and the OECD Due diligence Guidance for Responsible Business Conduct.

The strategic imperative for companies to act now

The EU's recent agreement on the CSDDD confirms the global trend towards mandatory human rights and environmental due diligence and highlights the strategic imperative for companies to act now.

By implementing due diligence systems across value chains, companies can meet compliance obligations while – simultaneously – fostering trust with their stakeholders, engendering investor confidence, and improving risk management systems. The journey towards responsible business conduct may be uphill, but for those who begin the climb, the rewards are worth it.