On the 24th of may, the Council of the European Union approved on the CSDDD, the Corporate Sustainability Due Diligence Directive; a new legislation with the aim to foster sustainable and responsible corporate behavior. Businesses have to address human rights and environmental impact regarding their business activities, inside and outside Europe. So this is very good news, since the directive will stimulate a transition towards a sustainable economy. Read all you need to know about the CSDDD in this article.
What is the CSDDD?
The CSDDD establishes a corporate due diligence duty. Due diligence refers to the duty of companies to address impacts or risks to people and the environment in their production processes. Businesses will have to identify and address these potential and actual adverse human rights and environmental impacts that are caused by their own company’s operations, processes, and subsidiaries.
And the responsibility doesn’t stop here; the directive is also related to their value chain(s), the impacts of their business partners.
The directive also sets out an obligation for large companies to adopt a transition plan for climate change mitigation, aligned with the 2050 climate neutrality objective of the Paris Agreement and other intermediate targets under the European Climate Law.
The due diligence obligation must be fulfilled by following six steps:
- Integrate corporate social responsibility into policy and management systems
- Identify and assess adverse effects in activities, supply chains, and business relationships
- Stop, prevent, or mitigate adverse effects
- Monitor practical application and outcomes
- Communicate how impacts are addressed
- Provide for remediation measures or collaborate in their implementation where applicable
These steps are designed to manage risks to people and the environment and to address impacts that have occurred. 'Risks to people and the environment' encompasses a wide range of sustainability issues. This may involve various themes related to labor conditions and safety, equal pay, as well as environmental concerns like CO2 emissions, water usage, or biodiversity loss.
What will be the consequences of the CSDDD?
The CSDDD will have many favorable consequences and benefits. Let’s look at them at a level of citizens, companies and counties:
Citizens
- Enhanced protection of human rights, including labor rights
- A healthier environment for current and future generations, helping to address issues like climate migration
- Increased trust in businesses due to greater transparency, enabling more informed consumer choices
- Improved access to justice for victims
Companies
- A harmonised legal framework across the EU, offering legal certainty and a level playing field
- Enhanced trust from customers and deeper commitment from employees
- Heightened awareness of potential negative impacts on human rights and the environment, reducing liability risks
- Improved risk management leading to greater resilience and competitiveness
- Increased appeal to talent, investors focused on sustainability, and public procurers
- New incentives for innovation and better access to financing
(Developing) Countries
- Strengthened protection of human rights and the environment
- Promotion of sustainable investment and capacity building to support companies within the value chain
- Enhanced adoption of international sustainability practices
- Improved living conditions through better environmental and social governance
When do organisations have to comply?
The directive sets broad expectations for businesses regarding sustainability, the detailed rules and their implementation will be subject to further refinement during the transposition into national laws by EU member states.
The Member States will then have two years to transpose the Directive into their national law and communicate the relevant texts to the Commission before the rules will start to apply to companies. And there will be a gradual phase-in between 3 and 5 years up to the moment companies will have to be compliant.
The CSDDD is directly and primarily directed to companies meeting the following two criteria:
>1000 employees
> 450 million euro revenue
First group of companies, the one’s with > 5000 employees or a revenue > 1500 million euro’s have to be compliant in 2027. Organisations with 1000–5000 employees will be next, in the following years onwards.
And just 0,1% of all EU companies qualify in these categories. But the CSDDD makes companies responsible for the impact that occurs in their chains, and because of this, the CSDDD also impacts other, smaller companies.
The due diligence obligation extends across the entire chain, both upstream (towards suppliers and their suppliers) and downstream (towards customers and consumers). This requires companies to gain insight into their production chain and analyse and assess risks throughout the entire chain.
What does the CSDDD mean for smaller companies?
So what does the CSDDD mean for this chain partners, the smaller companies? They will be asked by their big & obliged-to-comply-chain partners to meet the requirements that the CSDDD places on them.
And the small companies may need to adapt their operations to meet the due diligence requirements, this could involve enhancing transparency about their supply chain practices, improving environmental and social governance (ESG) standards, and implementing stricter controls to minimise negative impacts on human rights and the environment.
Small companies might also need to participate in audits or provide data proving their compliance with sustainability practices. This alignment will not only help in maintaining business relationships but could also open new opportunities for small companies to differentiate themselves in a marketplace increasingly focused on sustainability.
How can we compare the CSDDD to the CSRD?
And what about the CSRD, you might be thinking. The CSRD (Corporate Sustainability Reporting Directive) is another new legislation in the sustainability context, that will have far-reaching impact on (ultimately) all companies in the EU.
The distinct differences between the CSRD and the CSDDD are as follows:
- The CSRD is really a reporting directive, and it focuses on reporting corporate sustainability performances. Companies are required to provide detailed information about their environmental, social, and governance (ESG) issues. The objective is to enhance transparency and inform investors and other stakeholders.
- The CSDDD focuses on sustainability due diligence obligations. Companies must implement processes to identify, prevent, mitigate, and remedy negative impacts on human rights and the environment in their value chain. The goal is to actively prevent and address adverse effects.
In summary, the CSRD is about what companies need to report (process-oriented), while the CSDDD is about what companies must do to manage negative sustainability impacts (outcome-oriented).
And what both directives have in common is the fact that companies are no longer able to “cherry-pick” on what information they share about their sustainable performance; they have to share it all. Not just the favorable information they select themselves.
With both directives in place, the whole and complete story will be leading. And with this, sustainability will become “not just a thing on the side”, but organisations will be stimulated to embed sustainability in all their choices and strategies. How hopeful is that.
Do you want to know more about the CSDDD, or the steps you can take to start working towards compliance? Reach out to us to learn more.
