In February 2022, the European Commission unveiled its proposal for the Corporate Sustainability Due Diligence Directive (CSDDD), introducing the concept of due diligence within the European Union. This directive aims to enhance the accountability of companies operating within the EU by requiring them to assess and anticipate the potential impacts of their activities, as well as those of their entire value chain, on the environment, human rights, and society.
What is the Corporate Sustainability Due Diligence Directive?
The Corporate Sustainability Due Diligence Directive (CSDDD) is a proposal from the European Commission to introduce mandatory due diligence across the EU. This directive will require companies to publish information on identified sustainability risks, including those from their suppliers, and to take measures to prevent these risks. It aims to ensure responsible corporate conduct in terms of sustainability, covering aspects such as human rights (compliance with the Universal Declaration of Human Rights) and the environment. The CSDDD is part of a broader approach to strengthen corporate transparency and accountability in relation to sustainability.
The CSDDD is aligned with the European Green Deal, a set of proposals to adapt EU policies to reduce greenhouse gas (GHG) emissions by at least 55% by 2030 compared to 1990 levels.
What is corporate due diligence?
Corporate due diligence is a legal obligation that requires companies to take steps to identify, prevent, and mitigate the social, environmental, and governance risks associated with their activities. This responsibility aims to ensure respect for human rights, environmental protection, and ethical and responsible management of their operations.
Corporate due diligence implies that companies carefully monitor their supply chains, assess the risks associated with their activities, and take corrective action if violations are identified. European law, through the CSDDD, aims to strengthen this obligation by imposing strict and common standards on EU companies to better control the legal risks associated with subcontracting, such as ensuring the health and safety of people and compliance with mandatory legal obligations.
What are the objectives of the CSDDD ?
The CSDDD aims to promote responsible corporate governance by requiring companies to consider the social and environmental impact of their activities. Its objectives include:
Ensuring that companies operate sustainably and responsibly throughout their value chain.
Preventing, ending, or mitigating the negative impacts of companies' activities on human rights and the environment.
Protecting the environment, ensuring social justice, and promoting a stronger and more sustainable economy.
Promoting responsible corporate governance by taking into account the social and environmental impact of companies' activities.
Providing companies with greater legal certainty, a level playing field, and greater transparency for consumers and investors.
When will the CSDDD come into effect?
The CSDDD has been progressing through the European legislative process since February 23, 2022, when it was proposed by the European Commission. On June 1, 2023, the European Parliament took a significant step by adopting its position on the CSDDD. However, before it can come into force, discussions between the Commission, the Council of the European Union, and the Parliament must still take place to resolve certain outstanding issues. These points notably include the participation of financial actors, procedures in case of disagreement, and the criteria for the companies concerned. A new milestone was reached on March 15, 2024, following the validation of an initial compromise by the member states of the European Council.
If the CSDDD is adopted in 2024, EU member countries will then have two years to transpose it into their national legislation.
Who will be affected by the CSDDD?
Just like the CSRD, the CSDD directive will have a significant impact on numerous businesses within the European Union. While the number of affected enterprises was revised downward on March 15 during a final validation by the member states of the European Council, nearly 5,500 companies will be affected, including:
Businesses established within the European Union with over 1,000 employees and generating global revenues exceeding €450 million.
Non-European companies generating revenues within the European Union surpassing €450 million.
The implementation deadlines for the directive vary depending on the size of the businesses:
Starting from 2027: For companies with over 5,000 employees and revenues of over €1,500 million.
Starting from 2028: For companies with over 3,000 employees and revenues of over €900 million.
Starting from 2029: For companies with over 1,000 employees and revenues of over €450 million.
What are the penalties for non-compliance with the CSDDD?
In case of non-compliance with the CSDDD, companies may face administrative penalties such as fines and injunctions to comply. These sanctions aim to ensure adherence to the obligations imposed by the directive regarding due diligence and sustainability. The fines will be determined based on the sanctioned company's turnover and cannot exceed 5% of it.
Each EU member state will need to appoint a supervisory authority responsible for verifying compliance and adherence to the obligations outlined by the CSDDD. The Commission will set up a European Network of Supervisory Authorities, where representatives from each country will be obliged to share their best practices.
A due diligence obligation already in place in some EU countries
Due diligence is not a new concept within the European Union. Several member states have already implemented their due diligence legislation, paving the way for a harmonized EU-wide approach.
France pioneering due diligence
In 2017, France took a leading role by enacting Law No. 2017-399, mandating due diligence for parent companies and ordering companies. This law applies to French companies with over 5,000 employees and foreign companies with over 10,000 employees in France. It requires these companies to establish a due diligence plan to address social and environmental issues related to their activities and those of their subsidiaries and business partners in France and abroad.
Global movement towards due diligence
France's initiative has been echoed by other EU member states. Germany introduced its Supply Chain Due Diligence Act (Lieferkettengesetz or LkSG) in 2023, while the Netherlands and the United Kingdom have also implemented national laws promoting corporate due diligence.
CSRD and CSDD: Two complementary directives
The CSDD directive complements the Corporate Sustainability Reporting Directive (CSRD), which came into effect on January 1, 2024. The CSRD aims to harmonize and strengthen the non-financial reporting obligations of large EU companies.
These two directives are designed to be implemented in tandem. The CSDD establishes due diligence obligations regarding human rights and the environment, while the CSRD serves as a central reporting tool for accountability. Companies subject to the CSRD will be required to include information in their reporting on identified risks, measures taken to mitigate them, and the observed outcomes.
The CSDD and CSRD are not standalone initiatives but rather two complementary pillars of a coherent EU regulatory framework for corporate sustainability.
Conclusion
The Corporate Sustainability Due Diligence Directive (CSDDD) represents a significant milestone in corporate regulation. By creating a unified legal framework at the EU level, it seeks to make companies responsible for the social and environmental consequences of their actions across their entire value chain. Companies must now embrace a proactive and thorough approach to recognize, prevent, and address risks linked to their operations. This requires a substantial shift in their governance and business methodologies, incorporating sustainability fully into their strategies and operations.