As both the EU Parliament and Council of the EU give the go-ahead for the Corporate Sustainability Due Diligence Directive (CSDDD), many companies will have to up their game to comply with the new rules.
On April 24, 2024, the 11th anniversary of the Rana Plaza tragedy in Bangladesh, the European Parliament voted in favor of the Corporate Sustainability Due Diligence Directive (CSDDD). Although the provisions were watered down significantly compared to the original legislative proposal, it is still a landmark decision that will impose human rights and environmental due diligence obligations on thousands of EU and non-EU companies.
The CSDDD marks a significant paradigm shift away from voluntary CSR initiatives, which have proven largely insufficient, to mandatory due diligence across a company’s value chain. The directive mandates companies to identify, prevent, mitigate, and ultimately end negative impacts on people and the planet, and to adopt a climate transition plan in line with the goals of the Paris Agreement.
Until recently, the directive’s fate was in limbo following protracted negotiations between member states in the Council of the EU which resulted in significant changes to the legal text. Still, the vote in the European Parliament in April 2024 and the final approval by the Council in May confirm once again: Companies are best advised to get ready for the CSDDD now. Given the implications for companies, policymakers are already referring to the CSDDD as a game changer for the way business will be conducted in Europe and elsewhere.
The scope of companies covered by the CSDDD is determined by turnover and employee thresholds, with SMEs being excluded. A previously envisaged expanded coverage of high-risk sectors was dropped during the negotiations. The CSDDD will apply to businesses that meet the following criteria:
The directive is estimated to affect approximately 5,300 companies in the EU and around 800 companies outside the EU. The numbers are significantly higher when taking into account indirect effects on SMEs which form part of large companies’ value chains and will be expected to comply with the due diligence policies and procedures of their customers.
Negotiations also centered on whether to include the financial sector in the scope of the CSDDD. According to the legal text adopted by the European Parliament and the Council, financial companies will only have to carry out mandatory due diligence for their own operations and the upstream part of their chain of activities. The more critical downstream activities were excluded from this obligation. However, subject to a review by the EU Commission no later than two years after the CSDDD enters into force, the EU may decide to tighten the rules.
Besides, regulated financial undertakings will also have to adopt a plan to ensure that their business models adhere to the goals of the Paris Agreement.
Heavily influenced by widely recognized international due diligence frameworks, such as the UN Guiding Principles on Business and Human Rights and the OECD Due Diligence Guidance for Responsible Business Conduct, the CSDDD will require in-scope companies to:
This risk-based approach is closely aligned with other national due diligence laws, such as the German Supply Chain Act, but places greater emphasis on meaningful stakeholder engagement as an integral part of the process.
Within the scope of the EU’s Green Deal, the CSDDD is expected to make a significant contribution to the EU’s goal of achieving climate neutrality by 2050. The directive therefore attaches great importance to climate change mitigation and requires affected companies to adopt a transition plan that ensures their business models and corporate strategies are compatible with the objective of limiting global warming to 1.5°C, as set out in the Paris Agreement.
This means that companies that have not already done so will need to set time-bound, science-based climate targets for 2030 and then at five-year-intervals until 2050. These should include absolute GHG emission reduction targets for Scopes 1, 2 and 3, where applicable.
Whether and how companies can be held liable for violations that occur in their value chains was a major point of contention during the CSDDD negotiations. Based on the adopted compromise text, affected parties will be able to file claims against companies under national law for harm resulting from intentional or negligent failure to comply with the CSDDD’s due diligence obligations. At the same time, companies cannot be held liable if the harm was caused solely by their business partners.
In addition, non-compliant companies may be subject to fines, exclusion from public procurement processes and public concessions.
Proposed by the European Commission in February 2022 as part of the EU’s Green Deal agenda, the CSDDD represents a central pillar of the ESG regulatory landscape.
The directive is closely linked to its reporting counterpart, the Corporate Sustainability Reporting Directive (CSRD), under which CSDDD-relevant KPIs can be reported. Together, they inform a company’s stakeholders, including investors, consumers, trade unions and others, about its sustainability practices, performance, and the measures it takes to manage ESG risks along the value chain.
Along with the EU Taxonomy Regulation, these legislative initiatives aim to direct investments towards sustainable economic activities that support the EU’s goal of reducing GHG emissions by 55% by 2030 and becoming carbon-neutral by 2050.
On May 24, 2024, the Council of the EU formally adopted the CSDDD, effectively completing the legislative process. The text of the CSDDD will now be published in the Official Journal of the EU and will enter into force 20 days later.
Member states will then have two years to transpose the directive into national law. In member states where national due diligence legislation is already in place, such as Germany and France, the respective national acts will need to be amended to conform with the CSDDD.
The application of the directive will be phased in according to the size of companies, with the first group having to comply three years after entry into force, which is expected to be in 2027.
IntegrityNext is a trusted partner with a strong track record of helping companies meet due diligence requirements such as those laid down in the German Supply Chain Act, the Swiss Supply Chain Act, the Norwegian Transparency Act, and others. Our systematic approach to supply chain risk management already allows you to fulfill many of the upcoming CSDDD obligations today.
Key benefits of the IntegrityNext platform include:
To learn more about our solutions and how we can help you, please schedule a personal demo of our platform with one of our experts.
