The European Commission has 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 strengthening corporate transparency and accountability concerning sustainability.
The CSDDD aligns with the European Green Deal, a set of proposals aimed at adapting 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 seeks to ensure respect for human rights, environmental protection, and ethical and responsible management of their operations.
Corporate due diligence requires companies to 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 uniform standards on EU companies to better manage the regulatory 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 CSDD directive, following its legislative journey which began on February 23, 2022, with the European Commission's proposal, has been officially adopted. On March 15, 2024, the first compromise was approved by the member states of the European Council, marking a key milestone before its implementation. The European Parliament subsequently approved the text on April 24, 2024.
Published in the Official Journal of the European Union on July 5, 2024, the directive (Directive 2024/1760) came into force on July 25, 2024. Member states have two years to transpose the directive into their national legislation.
The rules will be applied gradually, starting in 2027 for the first group of companies.
Who will be affected by the CSDDD?
Similar to 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 7,000 companies will be affected, including:
Businesses established within the EU with over 1,000 employees and generating revenues exceeding €450 million worldwide.
Non-European companies generating revenues within the EU 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.
The European Commission recently published an FAQ (in English) to clarify the key elements of the CSDDD.
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's pioneering role in 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.
Commentaires