Background and Purpose
On 23 February 2022, the European Commission adopted a proposal for the Corporate Sustainability Due Diligence Directive (CSDDD/the Directive). The CSDDD is one of several measures introduced by the EU in line with the European Green Deal, including the Corporate Sustainability Reporting Directive (CSRD), EU Taxonomy Regulation, and the Sustainable Finance Disclosure Regulation (SFDR). The Directive requires companies “and their upstream and downstream partners, including supply, production, and distribution to prevent, end, or mitigate their adverse impact on human rights and the environment. Such impact will include slavery, child labor, labor exploitation, biodiversity loss, pollution or destruction of natural heritage”.
While a significant move for the EU, the scope of the CSDDD has shrunk since its introduction. The minimum threshold of employees has increased (from 500 to 1000); so has the net worldwide turnover threshold (from €150M to €450M). These changes are estimated to have reduced the coverage of the CSDDD from the originally envisaged 16,000 companies to 5,500 companies.
The CSDDD was approved by the European Parliament on 22 April 2024, with 374 votes in favor, 235 against, and 19 abstentions. The directive has to be signed and published in the EU Official Journal. Member states will have two years to adopt the Directive into their domestic laws, and companies have been provided a glide path to compliance.
Scope and Coverage
The CSDDD will apply to large companies operating in the EU that meet certain size thresholds. These thresholds are based on a company's net turnover and employee headcount. Companies that meet two of the following three criteria will be subject to the CSDDD's requirements:
EU Companies:
EU companies with over 1,000 employees and an annual net worldwide turnover of over €450 million.
EU companies that have entered into franchising or licensing agreements with third-party contractors in the EU for royalties that exceed €22.5 million and have a net worldwide turnover of more than €80 million.
Non-EU Companies:
Non-EU companies with an annual net turnover of more than €80 million in the EU.
Non-EU companies that have entered into franchising or licensing agreements with third-party contractors in the EU for royalties that exceed €22.5 million and have a net worldwide turnover of more than €80 million
Financial Undertakings:
Regulated financial undertakings are only subject to due diligence obligations for their own operations, those of their subsidiaries, and the upstream part of their chain of activities. These undertakings are expected to consider adverse impacts and use their leverage to influence companies, including through the exercise of shareholders’ rights
These entities are required to adopt human rights and environmental due diligence, climate transition plans, provide remediation, engage meaningfully with stakeholders, establish notification mechanisms and complaints procedures, and monitor and assess effectiveness.
Key Obligations of CSDDD:
The CSDDD introduces a range of obligations for in-scope companies to adopt and implement due diligence policies, climate transition plans, and remediation measures, as well as to engage meaningfully with stakeholders and establish notification mechanisms and complaints procedures. This section outlines the key obligations under the CSDDD, providing a comprehensive overview of the requirements for companies to ensure compliance with the Directive.
The obligations of in-scope companies:
Adopt Human Rights and Environmental Due Diligence
Develop a due diligence policy that ensures risk-based due diligence and integrates due diligence into relevant policies and risk management systems.
Identify and assess actual or potential adverse human rights and environmental impacts.
Prevent and mitigate potential adverse impacts and bring to an end or minimize the extent of actual adverse impacts.
Take appropriate measures to address adverse impacts in a manner commensurate to the degree of severity and likelihood of the adverse impact
Adopt and Put into Effect a Climate Transition Plan:
Develop a Climate Change Mitigation Transition Plan (CTP) to ensure the company's business model and strategy are compatible with limiting global warming to 1.5°C in line with the Paris Agreement.
The CTP must contain time-bound targets in five-year steps from 2030 to 2050, including absolute greenhouse gas emission reduction targets for scope 1, 2, and 3 emissions.
The plan must also address the exposure of the company to coal-, oil-, and gas-related activities
Provide Remediation This is defined as the ‘restoration of the affected person(s), community(ies), or the environment to a situation equivalent or as close as possible to the situation they would be in had the actual adverse impact not occurred’. This could include pecuniary and/or non-pecuniary measures.
Provide remediation aligned with the UNGP, including restoration of the affected person(s), community(ies), or the environment.
Ensure that where a company has caused or jointly caused an actual adverse impact, it will provide remediation.
Remediation must restore the affected person(s), community(ies), or environment to a situation equivalent or as close as possible to the situation they would be in had the actual adverse impact not occurred
Engage with Stakeholders
Carry out consultations at various stages of the due diligence process, providing comprehensive information to stakeholders.
Engage with stakeholders to effectively address their concerns and ensure transparency in the due diligence process
Establish a Notification Mechanism and Complaints Procedure:
Establish a fair, publicly available, accessible, predictable, and transparent procedure for dealing with complaints.
Allow persons or organisations with legitimate concerns to submit complaints and provide a mechanism for submitting information about adverse impacts.
Monitor and Assess Effectiveness:
Carry out periodic assessments of own operations and measures, those of subsidiaries, and those of business partners.
Assess implementation and monitor the adequacy and effectiveness of the identification, prevention, mitigation, bringing to an end, and minimization of adverse impacts
Communicate Compliance:
Publish an annual statement on CSDDD matters on the company's website within 12 months of the end of the financial year, unless subject to sustainability reporting obligations under the Corporate Sustainability Reporting Directive (CSRD)
These obligations are designed to ensure that companies in the scope of the CSDDD conduct human rights and environmental due diligence in their own operations and across their value chains and to promote sustainable and responsible corporate behavior.
Key Dates and Timelines for Implementation
2027 onwards:
EU companies with more than 5,000 employees and €1,500 million net worldwide turnover
Non-EU companies with more than €1,500 million net turnover generated in the EU.
2028 onwards:
Companies with more than 3,000 employees and €900 million net worldwide turnover
Non-EU companies with more than €900 million net turnover generated in the EU
2029 onwards:
Companies with more than 1,000 employees and EUR 450 million turnover.
Considerations and How Can Organizations Prepare:
To ensure compliance with the EU Corporate Sustainability Due Diligence Directive (CSDDD), in-scope companies should start preparing now, even though the implementation timeline is not yet in effect. The CSDDD requires companies to implement various measures, such as due diligence policies, climate transition plans, and remediation measures, which will take time to operationalize. It is essential to involve key internal stakeholders, including legal and compliance functions, in the implementation process from the beginning to ensure a smooth transition.
Here are a few steps that organizations can take to prepare for CSDDD directive:
Integrating due diligence into the company’s policies and risk management systems (article 5)
Ensure that due diligence is integrated into relevant policies and risk management systems.
Identify and assess actual or potential adverse human rights and environmental impacts.
Prioritize steps based on severity and likelihood of adverse impacts.
Identify and assess actual or potential adverse impacts, and where necessary, prioritize potential and actual adverse impacts (article 6)
Identify and assess upstream and downstream business partners.
Conduct periodic assessments to identify adverse impacts with internal and external information sources
Prioritize adverse impacts based on likelihood and impact
Ensure that due diligence is applied to all activities in the chain of activities.
Prevent and mitigate potential adverse impacts, bring actual impacts to an end and minimize their extent (articles 7 & 8)
Seek contractual assurances from business and value chain partners
Where impacts involve SMEs, provide targeted and proportionate support, implement fair and reasonable contractual assurances
Collaborate with industry associations, multi-stakeholder initiatives, and global framework agreements to establish common standards and best practices.
Engage with suppliers and business partners to ensure they are aware of and comply with the CSDDD.
Establish and maintain a Notification Mechanism and Complaints Procedures (article 9)
Establish notification mechanisms for submitting information about adverse impacts.
Ensure a fair, publicly available, accessible, predictable, and transparent procedure for dealing with complaints.
Take reasonable steps to prevent all forms of retaliation and provide adequate information to all those involved
Monitor the effectiveness of due diligence policy and measures (article 10)
Develop a monitoring and assessment plan to track the effectiveness of due diligence and remediation efforts.
Use qualitative and quantitative indicators to measure improvement.
Carry out assessments to monitor the effectiveness of the policies and process in place, as well as the measures taken to identify potential and actual adverse impacts.
Publicly communicate on due diligence (article 11):
For those who need to comply with CSRD: report on due diligence through CSRD-compliant reports
For the others: issue an annual statement describing how the due diligence process was implemented
Combatting climate change (article 11):
Develop a climate change mitigation transition plan (CTP) that is aligned with the Paris Agreement and includes intermediate and 2050 climate neutrality targets.
Ensure the CTP addresses exposure to coal-, oil- and gas-related activities.
Stakeholder Engagement:
Develop a stakeholder engagement strategy that includes consultations at various stages of the due diligence process.
Ensure comprehensive information is provided to stakeholders
The CSDDD is a significant step toward promoting corporate accountability and sustainability in the EU. It aims to ensure that companies in scope of the Directive conduct due diligence in their own operations and across their value chains, and to promote sustainable and responsible corporate behavior. By complying with the CSDDD, companies can ensure transparency and accountability, and contribute to a more sustainable and responsible business model.
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