The EU's Corporate Sustainability Due Diligence Directive: A Deep Dive

The European Union (EU) has consistently championed corporate responsibility and sustainability. In 2024, the EU reinforced this commitment by enacting the Corporate Sustainability Due Diligence Directive (CSDDD). This groundbreaking legislation requires companies to proactively identify, prevent, mitigate, and account for adverse human rights and environmental impacts within their operations and value chains¹. This report offers a detailed examination of the CSDDD, with a particular emphasis on the requirements for companies to identify and mitigate social and environmental impacts in their supply chains.

Understanding the CSDDD

The CSDDD, formally Directive 2024/1760, came into effect on July 25, 2024¹. It forms a crucial part of the European Green Deal, a collection of policy initiatives designed to achieve climate neutrality in Europe by 2050². The CSDDD seeks to encourage sustainable and responsible corporate conduct by ensuring companies address the adverse impacts of their actions, both within and beyond Europe's borders¹. One of the key objectives of this directive is to improve living conditions for people¹. It is hoped that the CSDDD will serve as an international benchmark for responsible business conduct, catalyzing action from businesses to address key human rights and environmental challenges globally³.

The CSDDD will be implemented in stages, targeting companies based on their size and turnover:

It's important to note that when calculating employee thresholds, part-time and temporary workers are considered full employees⁴.

The Directive operates on the principle of "obligations of means and not of results." ⁵ This means companies are evaluated based on their implementation of appropriate measures to meet due diligence objectives, proportionate to the severity and likelihood of identified adverse impacts. The focus is on the process and effort taken, rather than achieving specific outcomes⁵. Furthermore, the CSDDD allows companies to prioritize adverse impacts based on their severity and likelihood, enabling a risk-based approach to due diligence⁶.

Due Diligence Requirements

The CSDDD mandates that in-scope companies conduct risk-based human rights and environmental due diligence. This involves identifying and assessing actual and potential adverse impacts in their own operations, those of their subsidiaries, and their value chain, which includes both direct and indirect business partners. The core elements of this duty are:

• Identifying: This involves actively seeking out and pinpointing potential and actual adverse human rights and environmental impacts across the company's operations and value chain. This could include, for example, identifying potential risks of child labor in a manufacturing process or assessing the environmental impact of sourcing raw materials.
• Bringing to an end: If a company identifies existing harmful practices, it must take immediate steps to cease them. This might involve terminating contracts with suppliers engaged in unethical labor practices or halting environmentally damaging activities.
• Preventing: Companies must take proactive measures to avoid potential negative impacts. This could include implementing robust supplier codes of conduct, investing in cleaner technologies, or providing training to employees on human rights and environmental awareness.
• Mitigating: Where adverse impacts cannot be completely avoided, companies must take steps to minimize their severity. This might involve working with suppliers to improve their environmental performance, implementing grievance mechanisms for workers, or investing in community development projects to address social issues.
• Accounting for: Companies need to monitor and report on their due diligence efforts and their effectiveness. This includes tracking key performance indicators, conducting audits, and transparently communicating their progress to stakeholders.

The CSDDD specifically highlights the importance of considering issues such as child labor, slavery, pollution, deforestation, excessive water consumption, and damage to ecosystems.

Key Steps for Compliance

The OECD Guidelines for Responsible Business Conduct offer a practical framework for companies to comply with the CSDDD⁷. This framework outlines six key steps:

1. Integrate due diligence into policies and risk management systems: Companies should develop a comprehensive due diligence policy that outlines their approach to identifying and managing risks. This policy should be integrated into the company's overall risk management framework and developed with input from employees and stakeholders⁷.
2. Identify and assess actual and potential adverse impacts: This involves conducting a thorough assessment of the company's own operations and value chain to identify potential and actual adverse impacts on human rights and the environment. Companies should prioritize areas with the highest likelihood and/or most severe level of impact⁷.
3. Prevent and mitigate actual and potential adverse impacts and bring actual adverse impacts to an end: Once adverse impacts are identified, companies must take appropriate steps to prevent or mitigate them. This may involve implementing new policies, procedures, or technologies, engaging with suppliers and business partners, or providing support to affected stakeholders⁷.
4. Track the effectiveness of the due diligence policy and measures: Companies need to establish mechanisms to monitor the effectiveness of their due diligence efforts and make adjustments as needed. This may involve collecting data on key performance indicators, conducting audits, and seeking feedback from stakeholders².
5. Establish a complaints procedure: Companies must establish accessible and transparent complaint mechanisms for individuals and organizations to report concerns about actual or potential adverse impacts. These mechanisms should protect the confidentiality of complainants and prevent retaliation².
6. Publicly communicate about due diligence efforts: Companies are required to publish an annual statement on their due diligence efforts, including information on identified risks, mitigation measures, and the effectiveness of their approach⁷.

Focus on Supply Chains

The CSDDD explicitly extends due diligence obligations to a company's supply chain. This means companies must assess not only their own operations but also those of their suppliers, subcontractors, and other business partners⁹. This can be a complex task, given the often long and intricate nature of supply chains, which frequently span multiple countries and involve a diverse range of actors.

Mapping the Supply Chain

A crucial first step is to map the supply chain, identifying all entities involved in the production and distribution of the company's products or services⁹. This mapping process helps companies understand the structure of their supply chain, identify potential risk areas, and prioritize due diligence efforts.

Assessing Supplier Risks

Once the supply chain is mapped, companies need to conduct risk assessments to evaluate the likelihood and severity of potential adverse impacts associated with each supplier and business partner. This assessment should consider factors such as the country of operation, the industry sector, the type of product or service provided, and the supplier's own human rights and environmental policies.

Engaging with Suppliers

Open and proactive engagement with suppliers is essential. Companies should clearly communicate their expectations regarding human rights and environmental performance and provide support for improvement. This might involve sharing best practices, offering training programs, or collaborating on sustainable sourcing initiatives.

Monitoring Supplier Performance

To ensure ongoing compliance with the CSDDD, companies need to monitor supplier performance. This can be achieved through tracking key performance indicators, conducting audits, and requiring suppliers to submit regular reports on their due diligence efforts.

Contractual Provisions

Companies should incorporate sustainability and human rights clauses into contracts with suppliers⁹. These clauses can outline specific requirements related to labor standards, environmental protection, and ethical business practices.

The CSDDD acknowledges the importance of supporting small and medium-sized enterprises (SMEs) in meeting these new requirements. Companies are expected to provide targeted and appropriate support to SME business partners, including access to capacity building, training, and modernization of management systems¹⁰.

Furthermore, the CSDDD requires companies to take protective measures for vulnerable stakeholders when necessary. This includes considering the specific needs and risks faced by groups such as migrant workers, indigenous communities, and children¹⁰.

Climate Transition Plans

The CSDDD requires in-scope companies to develop and implement climate transition plans⁷. These plans must outline a strategy to ensure the business is aligned with the Paris Agreement goal of limiting global warming to 1.5°C⁷. This requirement highlights the interconnectedness of climate action with broader sustainability due diligence, recognizing that environmental and social responsibility are intertwined⁷.

The plans must include:

• Time-bound targets, including emission reduction targets for scope 1, 2, and 3 greenhouse gas emissions⁹.
• Decarbonization strategies, including key actions and steps to achieve these targets⁹.
• Investment details, including explanations and qualifications of investments and funding for the transition plan⁹.

Companies must report on their progress and update their plans annually¹¹.

Liability and Access to Justice

The CSDDD includes important provisions for liability and access to justice for victims of harm caused by business activities¹². This means that companies that cause harm may be held liable for damages, and victims may have access to legal remedies and compensation. This aspect of the CSDDD underscores the legal implications for companies and the rights afforded to individuals and communities affected by non-compliance.

Enforcement and Penalties

National authorities in each EU member state will enforce the CSDDD¹³. Companies that fail to comply with the Directive may face a range of penalties, including:

• Fines: Up to 5% of their global turnover¹³. This potential fine is significantly higher than the maximum fine under the German Supply Chain Due Diligence Act (LkSG), highlighting the strong enforcement mechanisms of the CSDDD¹⁵.
• Civil liability: Companies could be held liable for damages caused by their failure to prevent or mitigate adverse impacts¹³.
• Suspension or withdrawal of licenses and authorizations. ¹²
• Exclusion from public procurement processes. ¹²

Beyond these formal penalties, non-compliant companies may also suffer reputational damage, potentially leading to a loss of customers and investors¹².

Preparing for the CSDDD

Companies within the scope of the CSDDD should take immediate steps to prepare for compliance. This includes:

• Conducting a gap analysis: Assess current practices and identify areas where improvements are needed.
• Developing a due diligence policy: Establish a comprehensive policy that outlines the company's approach to identifying and managing human rights and environmental risks.
• Mapping the value chain: Identify all suppliers and business partners and assess their potential impact on human rights and the environment.
• Engaging with stakeholders: Communicate with employees, suppliers, and other stakeholders about the CSDDD and the company's commitment to compliance.
• Developing a climate transition plan: Establish a plan to align the business with the Paris Agreement goal of limiting global warming to 1.5°C.
• Implementing monitoring and reporting mechanisms: Track key performance indicators and report on progress towards compliance.

When preparing for the CSDDD, companies need to decide whether to treat compliance as a separate activity or integrate it into broader organizational transformation efforts¹¹. This strategic decision will influence how companies allocate resources, structure their internal processes, and engage with their stakeholders.

Conclusion

The CSDDD marks a significant advancement in the EU's efforts to promote sustainable and responsible business practices. By mandating a proactive approach to due diligence, the Directive aims to prevent human rights abuses and environmental damage across global value chains. While compliance with the CSDDD may present challenges, particularly for businesses with complex global supply chains, it also offers opportunities. Companies can leverage the CSDDD to improve their sustainability performance, enhance their reputation, and contribute to a more just and sustainable world.

The CSDDD has the potential to influence global sustainability standards, encouraging other countries and regions to adopt similar legislation. By holding companies accountable for their impacts throughout their value chains, the CSDDD can drive responsible business practices worldwide and contribute to a more sustainable future for all.

Works cited

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