In our recently released ESG regulation timeline, we covered the recent and upcoming regulatory changes that will affect corporate sustainability reporting and disclosures. In this article we take a deeper diver into the Corporate Sustainability Due Diligence Directive, or CSDDD, which was greenlit on a June 1st 2023 European Parliament vote.
In an era where social and environmental concerns have gained significant traction, businesses worldwide are increasingly recognising the need for corporate sustainability due diligence.
The European Union (EU), renowned for its commitments to sustainability, has taken a proactive stance in this area with several new ESG-related regulations, but the most recently agreed (as of June 1st, 2023) is the EU Corporate Sustainability Due Diligence Directive, or CSDDD.
Here we aim to summarise and explain the key information provided on the European Commission's page on corporate sustainability due diligence, highlighting its significance and implications for businesses operating in the EU over the coming months and years.
Since the legislation will cover thousands of companies that might not already be working to identify areas of their wider operations that need attention, we’ll start with a quick definition of what this new directive will cover.
Corporate sustainability due diligence refers to the process by which businesses identify, prevent, mitigate, and account for potential adverse impacts on people and the planet throughout their operations and value chains. It involves assessing social, environmental, and governance risks and impacts associated with a company's activities, and taking appropriate actions to address them.
The CSDDD establishes clear requirements for companies operating in the EU to conduct corporate sustainability due diligence on an annual basis, and covers a wide range of ESG risks, including factors such as climate change, deforestation, and human rights abuses.
In the Europoean Commission’s view, corporate sustainability due diligence is essential for achieving the EU's sustainability goals and fostering responsible business conduct. It aims to ensure that companies operating in the EU internal market avoid causing harm to people and the planet, both within and beyond its borders.
The EU has a long-standing commitment to sustainability and social responsibility and considers it a top political priority – and these new regulations put real terms against those intentions. Recognising that companies play a crucial role in creating a sustainable and equitable economy and society, the Commission aims to provide them with a clear framework of support. The introduction of EU-level legislation on corporate sustainability due diligence will not only promote the green transition but also protect human rights, both within Europe and beyond.
And while the regulations serve to advance the priorities of the EU itself, affected civil society organisations and companies have also advocated for such measures. A significant majority of companies – around 70% who participated in a preliminary study on due diligence in 2020, as well as a 2021 open public consultation – expressed the need for a harmonised EU legal framework on due diligence to address human rights and environmental impacts. Centralised, agreed frameworks are often the launchpad to robust responses and action, and clearly, the EU has recognised this in creating the CSDDD.
The CSDDD introduces a corporate duty that encompasses the identification, prevention, mitigation, and cessation of, and accountability for, adverse human rights and environmental impacts within a company's operations, subsidiaries, and value chains.
The proposal draws inspiration from the UN's Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises, and responsible business conduct principles, aligning with internationally recognised human rights and labour standards.
In practical terms, the proposal requires that companies falling under its scope undertake the following actions:
Consequently, companies are required to implement appropriate measures to prevent, cease, or mitigate impacts on the rights and prohibitions outlined in international human rights agreements. This includes ensuring workers' access to sufficient food, clothing, and water, as well as adequate sanitation in the workplace. Additionally, companies must take actions to prevent, cease, or mitigate negative environmental impacts that contradict various multilateral environmental conventions.
Furthermore, the proposal mandates that certain large companies develop a plan to align their business strategies with the goal of limiting global warming to 1.5 °C, in line with the Paris Agreement.
We covered the CSDDD briefly in a recent Supplier Decarbonisation webinar, which you can see a snippet of below:
The legislative proposal on corporate sustainability due diligence includes several key elements:
It’s currently anticipated that around 17,000 companies will be affected by the new directive, although this is just an estimate. The regulations split companies into groups with different responsibility thresholds, depending on certain criteria regarding size, turnover, and industry vertical. Below is a summary of these groups, along with how many are estimated to be part of each group.
Micro companies and SMEs are not directly affected by the proposed rules. However, the proposal provides supporting measures for SMEs.
The CSDDD comes with real consequences of inaction. At the time of writing, we understand that companies found to be non-compliant with the CSDDD once reporting cycles have begun could include:
It’s also anticipated that the directive will make provisions to enable victims to obtain compensation for damages, thereby giving those affected by harm the opportunity to hold companies accountable for remedies, as mentioned earlier. In real terms this means that victims will have the ability to bring civil liability claims before national courts.
The civil liability includes not only companies' own operations, but those of its subsidiaries and also established business relationships with which a company cooperates on a regular and frequent basis, where the harm could have been identified, and prevented or mitigated, with appropriate due diligence measures. This very much includes suppliers at every level of the chain, thus making supplier engagement and collaboration a vital component of complying with the directive.
However, as well as potential penalties, implementing corporate sustainability due diligence through Supplier Collaboration and Innovation brings numerous benefits to businesses, including:
The CSDDD underscores the EU's commitment to promoting responsible and sustainable business practices. By introducing clear obligations, enhancing supply chain responsibility, emphasising transparency and reporting, and ensuring access to remedies, the EU aims to create a level playing field where companies prioritise sustainability and contribute to a more socially and environmentally conscious future.
And most crucially for our readers, the proposal will emphasise the need for businesses to extend their due diligence efforts to encompass suppliers too, ensuring responsible practices throughout every level of the supply chain.
The organisations who respond to this by engaging, aligning, collaborating, and innovating with supplier stakeholders on their sustainability goals will most effectively position themselves to comply with upcoming regulations such as the CSDDD, and to deliver on a more sustainable vision for our future.
You can read more about other upcoming ESG regulations in our recent timeline “ESG regulation 2023: What this means for procurement and sustainable procurement”.
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