Corporate Sustainability Due Diligence Directive: the impact on businesses

Dive into the intricacies of corporate sustainability with one of the European Union’s most relevant initiatives, the Corporate Sustainability Due Diligence Directive (CSDDD). As a pivotal component of the European Green Deal, corporate sustainable governance has rapidly evolved, presenting businesses with both challenges and opportunities.

While the CSDDD awaits formal adoption, its impact on companies’ management of environmental, social, and governance (ESG) factors is expected to be highly relevant.

In this blog post, Publyon provides a deep dive into the CSDDD exploring its purpose and broader scope. Most importantly, we’ll shed light on the impact of the CSDDD on businesses operating both in Europe and abroad, highlighting the strategies needed to thrive in this evolving regulatory environment.

What is the Corporate Sustainability Due Diligence Directive (CSDDD)?

In February 2022, the European Union took a significant step towards fostering sustainable corporate practices by announcing legally binding legislation on Corporate Sustainability Due Diligence. This Directive aims to encourage companies to uphold human rights and minimise environmental impacts across their operations and supply chains.

While several EU member states already have voluntary due diligence measures in place, they often lack comprehensive coverage and enforceability. The proposed Directive seeks to rectify this by establishing a harmonised legal framework in the EU, ensuring a level playing field while enhancing transparency and accountability of businesses. By integrating human rights and environmental considerations into corporate governance, the directive aims to mitigate adverse impacts on society and climate, thus promoting responsible business conduct both within and outside Europe.

According to the European Commission’s proposal, the benefits of the Directive are manifold. For citizens, they promise better protection of human rights and a healthier environment, fostering trust and enabling informed consumer choices. For companies, compliance offers not only legal certainty but also enhanced customer trust, employee commitment, and access to talent and financing.

Moreover, the Directive may drive innovation and bolster companies’ resilience through improved risk management. Overall, the Corporate Sustainability Due Diligence Directive represents a pivotal moment in the pursuit of sustainable and responsible corporate behaviour on a global scale.

Corporate Sustainability Due Diligence Directive: who is affected?

The CSDDD sets out to instil corporate responsibility by addressing actual and potential adverse impacts on human rights and the environment within companies’ own operations, subsidiaries, and business partnerships.

According to the compromise text agreed on by the EU Member States in March 2024 the following typologies of companies would fall under the CSDDD, including:

• EU companies and parent companies with over 1000 employees and a worldwide turnover higher than 450 million euros.
• Non-EU companies and parent companies with equivalent turnover in the EU.

An initial provision touching upon companies from “high impact” sectors (manufacture and wholesale trade of textiles, clothing and footwear, agriculture including forestry and fisheries, manufacture of food and trade of raw agricultural materials, extraction and wholesale trade of mineral resources or manufacture of related products and construction) has been deleted, with a possibility to later address the high-risk sectors approach, if necessary.

 It is expected that the law will affect around 5000 companies across the EU.

Companies and sectors out of scope are:

• Companies below the threshold of 1000 employees and a worldwide turnover higher than 450 million euros.
• Micro companies and SMEs (however, the Directive provides supporting measures for SMEs, which could be indirectly affected)
• Financial sector, including banks and insurers. While the sector will still have to perform checks on its suppliers and the products it uses, it is exempted from performing due diligence on its clients (The provisional agreement on the Directive also includes a review clause to assess a possible future extension of the rules to the sector).

Supervisory authorities designated by Member States oversee compliance, potentially influencing public contract awards. The Directive enhances access to justice, allowing a five-year window for claims and addressing barriers such as limited evidence disclosure and costs. Enforcement of the Directive involves administrative supervision and civil liability, ensuring oversight and compensation for damages. Member States will have to guarantee victims’ compensation for damages from non-compliance. As such, the framework established by the Directive should maintain accountability and adherence to the directive’s obligations.

What’s new on the Corporate Sustainability Due Diligence Directive?

 A provisional agreement on CSDDD was reached by the European Institutions in December 2023. However, the text has been recently at the centre of political quarrels, in particular in the Council of the European Union, where representatives of the Member States meet and decide the fate of EU legislation. The vote in the Council was postponed three times due to Germany’s potential abstention, as the German government saw the Directive being too bureaucratic and overburdening for companies’ supply relationships. The text already faced opposition from numerous EU countries, including Italy.

Nonetheless, on 15 March 2024, the EU ambassadors gave their green light to a revised version of the CSDDD text, overcoming weeks of pushback from sceptical countries that would saw the rules applying to companies with at least 1000 employees and annual sales of 450 million euros, rather than 500 employees and a turnover of 150 million euros, as initially suggested by the European Commission.

The European Parliament now needs to give its final approval to the latest version of the text before the rules can enter into force.

Corporate Sustainability Due Diligence Directive: implications for your business

The imperative for fostering sustainable corporate behaviour and responsible governance stems from stakeholders’ calls for mandatory due diligence, recognizing the pivotal role of businesses in building a sustainable economy. While many companies acknowledge the need for action, challenges persist due to supply chain complexities and fragmented regulatory frameworks, underscoring the necessity of cohesive EU-wide measures to drive sustainable practices forward.

As the CSDDD text slowly moves towards the finishing line, businesses should be aware of costs, obligations and fees expecting them in the near future.

 

Obligations

Under the CSDDD, companies within its scope are mandated to establish and implement effective due diligence policies aimed at identifying, preventing, mitigating, and ceasing potential and actual adverse impacts on the environment, including issues such as pollution and deforestation, as well as on human rights, such as child labour and labour exploitation.

Compliance involves policies extending beyond a company’s operations to encompass those of its subsidiaries and business partners, with obligations spanning the entire value chain. Specific aspects of due diligence include integrating it into existing policies and risk management systems, identifying and assessing impacts, preventing and mitigating potential adverse effects, and providing remediation when necessary.

Additionally, companies must engage with stakeholders, maintain a notification mechanism and complaints procedure, and monitor the effectiveness of their due diligence measures.

Moreover, certain companies covered by the CSDDD are required to adopt and implement a transition plan for climate change mitigation, aligning their business model and strategy with sustainability goals and climate targets. This plan must be regularly updated, with the European Commission set to provide practical guidelines within a specified timeframe.

Companies reporting transition plans in line with sustainability reporting standards are deemed compliant. The contents of the plans would be aligned with the Corporate Sustainability Reporting Directive (CSRD) and, to avoid duplicating reporting obligations, companies complying with the CSRD would be exempted from the obligation to adopt a climate transition plan. The financial sector is also covered by such a provision.

Finally, the directive includes provisions promoting a cultural shift towards sustainability, requiring companies to incentivize senior management towards the transition plan’s goals.

Below you can find a summarised checklist of obligations to comply with:

1. Integrate due diligence into internal policies.
2. Identify actual or potential adverse impacts on human rights and the environment.
3. Prevent and mitigate potential adverse impacts on human rights and the environment.
4. Bring actual adverse impacts to an end and minimise their extent.
5. Establish and maintain a complaints procedure.
6. Monitor the effectiveness of due diligence policy.
7. Publicly communicate due diligence measures (reporting obligations).
8. Adopt a plan to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement
9. Engage in meaningful stakeholder dialogue and consultation with affected stakeholders.

 

Non-compliance

Member States are mandated to establish penalties for violations of national laws aligned with the Directive’s provisions. According to the CSDDD text, penalties must be effective, proportionate, and dissuasive, encompassing both pecuniary sanctions and ‘naming and shaming’ measures.

Pecuniary penalties are determined based on a company’s global net turnover, with a maximum penalty threshold set at a minimum of 5% of the company’s net worldwide turnover from the preceding financial year. Member States have the discretion to set even higher maximum penalties. In cases where the violator is an EU or non-EU company acting as the ultimate parent company of a group, penalties are calculated based on their consolidated turnover.

Companies can be held civilly liable for intentional or negligent violations of CSDDD obligations aimed at protecting individuals or legal entities, necessitating full compensation under national law without overcompensation. Liability may extend to jointly and severally liable parties in cases where damage is caused collectively. Additionally, CSDDD imposes obligations on Member States to ensure national legal avenues for damages, including provisions for standing, injunctive relief, limitation periods for claims (minimum of 5 years), evidence discovery, and preservation. Member States may also enact more stringent national measures.

 

Estimated costs for businesses

Businesses will have to bear:

• The costs of establishing and operating the due diligence procedures.
• Transition costs, including the expenditure and investments to change a company’s own operations and value chains to comply with the due diligence obligation, if needed.

 

Challenges and opportunities

Amidst the evolving landscape of the Corporate Sustainability Due Diligence Directive, businesses encounter a mix of challenges and opportunities.

In terms of challenges, compliance with due diligence procedures may pose financial burdens and navigational complexities within a more stringent regulatory framework.

However, amidst the uncertainty lies the opportunity for businesses to enhance their reputation and market positioning by demonstrating a commitment to sustainability. Moreover, aligning with the CSDDD can open doors to access financing, tapping into the growing interest in environmental, social, and governance (ESG) factors among investors.

What are the next steps?

As businesses brace for potential changes in the regulatory landscape, they must navigate the complexities of the CSDDD while seizing opportunities to drive sustainable growth and resilience in the market. At the same time, they should closely monitor the ever-evolving political situation in the European Union, as the fate of the CSDDD text is on the line.

Publyon offers tailor-made solutions to navigate the evolving policy environment at EU level and anticipate the impact of the most relevant EU sustainable policies and political developments on your organization. Publyon advises organisations to:

• Ensure compliance with EU regulations by assessing their impact on operations: Publyon’s Policy Impact Scans provide organisations with a roadmap for navigating complex legislation, identifying the key EU and international policies that affect their business. This enables you to develop or adapt your business strategy with confidence and clarity, from day-to-day operations to the boardroom.
• Implement an EU funding strategy: Working with our partner Hezelburcht, we secure optimal grant support to achieve strategic, financial and innovative goals.
• Shape the future EU agenda: It is vital for organisations to be well-informed about policy developments in Brussels. Equipping yourself with the tools to strategically position your organisation in the evolving political landscape is key.
• Develop a public affairs strategy to have a say in the Commission’s programme: Publyon provides expert advice and guidance to help you understand legislation and its potential impact. Together we can tailor strategies to your organisation, influence the legislative process and build relationships with key decision-makers. Keeping abreast of EU sustainability developments ensures that you’re well placed to take advantage of the opportunities presented by the ongoing green transition.

At Publyon, we have a proven track record and extensive network that can help you realise your ambition to access policymakers by influencing and contributing to the political agenda.