The proposed Corporate Sustainability Due Diligence Directive (CSDDD), if adopted, would mandate that companies establish rigorous due diligence procedures to address the adverse impacts of their activities on human rights and the environment, both within their operations and throughout their global value chains. This initiative aims to cultivate responsible and sustainable corporate behavior while integrating sustainability considerations into a company’s operations and corporate governance practices.
The Aim of the Directive?
The CSDDD is a pivotal component of the European Green Deal, a comprehensive set of policy measures devised by the European Commission. Its overarching goal is to reshape the European Union’s policies concerning climate, energy, transportation, and taxation, aligning them with the objective of achieving a minimum 55% reduction in net greenhouse gas emissions by 2030 compared to 1990 levels. Ultimately, the plan seeks to make the EU carbon-neutral by 2050.
In conjunction with existing regulations and complementary initiatives such as the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy Regulation, the CSDDD represents another significant stride toward fostering sustainable business practices on a consistent European platform.
The Corporate Sustainability Due Diligence Directive (CSDDD) introduces varying obligations depending on the type of companies falling within its scope (as outlined in the table below). All companies covered by the directive will be required to establish comprehensive due diligence measures aimed at identifying, mitigating, preventing, and accounting for adverse impacts on human rights and the environment resulting from their activities. This entails the development and implementation of “prevention action plans,” obtaining contractual commitments from direct business partners, and subsequently verifying compliance. Importantly, companies under the directive’s purview must ensure due diligence not only within their own operations but also across their entire value chains, encompassing entities with which they have direct and indirect business relationships.
For companies with a turnover exceeding 150 million Euros (encompassing groups 1 and 3 below), an additional obligation involves crafting a strategy to align their business objectives with the goal of limiting global warming to 1.5 °C, as outlined in the Paris Agreement. If these companies identify climate change as a “principal risk” or a “principal impact” of their operations, they must incorporate emissions reduction targets into their business plans.
A notable feature of the Commission’s proposal is the elevation of senior-level responsibility for sustainability. Directors of EU companies would bear the responsibility of establishing and overseeing the implementation of due diligence processes, as well as integrating these processes into the corporate strategy. This directive extends the existing fiduciary duty of directors, which requires them to act in the company’s best interests, to encompass considerations related to human rights, climate change, and environmental consequences.
Environmental and Human Rights Impact:
The Corporate Sustainability Due Diligence Directive (CSDDD) aligns its due diligence requirements with key international human rights and environmental standards. However, it confines its coverage to rights and prohibitions explicitly listed in the proposal’s Annex, as well as any foreseeable human rights risks. The specified list encompasses a spectrum of labor rights, the prohibition of interference with freedom of thought, conscience, and religion, and the right to freedom of association, assembly, and collective bargaining. Although freedom of expression is not expressly mentioned, it is presumed to be within the scope of due diligence for media organizations, considering their operational context.
The Financial Regulations:
The CSDDD will be applicable to both EU and non-EU companies. For EU-based businesses, the directive covers companies with more than 500 employees and a turnover exceeding €150M, or those with over 250 employees and a €40M turnover, provided that 50% of their revenue comes from high-risk industries such as fashion, minerals, or agriculture.
Non-EU companies operating in the EU also fall under the CSDDD’s purview. This includes third-country companies in the EU that meet the specified turnover thresholds, regardless of whether they have a branch or subsidiary in the region, as long as the revenue is generated within the EU.
The European Union (EU) anticipates that the Directive will have a direct impact on approximately 13,000 companies within the EU and around 4,000 companies outside the EU.
It’s crucial to note that the CSDDD does not encompass the entire spectrum of sustainability or Environmental Social Governance (ESG) standards. Aspects such as diversity and inclusion or anti-corruption, which fall under the broader ESG framework, are not within the scope of the CSDDD’s provisions.
How will they enforce the new directive?
Enforcement of the Corporate Sustainability Due Diligence Directive (CSDDD) will primarily take place at the Member State level. The proposed directive introduces three key enforcement mechanisms:
- Administrative Supervision and Sanctions: Member States will designate an authority responsible for supervising and enforcing the CSDDD’s provisions, with the authority to impose administrative sanctions. These sanctions may include fines and compliance orders. At the European level, the Commission will establish a European Network of Supervisory Authorities, bringing together representatives from national authorities to ensure a coordinated approach. Individuals and organizations will have the right to submit well-founded concerns to any supervisory authority, alleging non-compliance by a company.
- Civil Liability: Member States will ensure that victims have access to compensation for damages resulting from a company’s failure to fulfill its due diligence obligations.
- Financial Incentives: Implementation of emissions reduction plans will be integrated into the financial incentives of directors of EU companies by linking their variable remuneration to their contributions to achieving these plans.
It’s worth noting that certain aspects of the CSDDD will be enforced through existing national laws and regulations in Member States. For example, the directive does not establish an additional enforcement regime in case directors do not meet their obligations under the CSDDD. Instead, Member States will need to amend their laws and regulations governing directors’ duties, expanding these to include considerations of human rights, climate change, and environmental consequences alongside their existing fiduciary duties. This modification will have various implications within domestic company law. For instance, shareholders may have the ability to take legal action against directors who breach this extended fiduciary duty. Consequently, the CSDDD may heighten the risk of sustainability-related strategic litigation, which is an increasingly prominent concern for companies.
The Current and Future Overview:
The Corporate Sustainability Due Diligence Directive (CSDDD) was initially proposed by the Commission in February 2022. In December 2022, the European Council finalized its general approach to the directive. Their proposal suggests narrowing the scope to encompass only EU companies with over 1,000 employees and a minimum net worldwide turnover of EUR 300 million, along with non-EU companies holding EUR 300 million in net turnover generated within the EU. On the contrary, members of the European Parliament (MEPs), who are still in the process of determining Parliament’s position on the matter, appear inclined to broaden the directive’s scope to include a more extensive range of companies.
The Council diverged from the Commission’s original proposal in several ways. They rejected the idea that due diligence should be part of directors’ fiduciary duty of care. Instead, the Council suggests that due diligence processes should be integrated into companies’ risk management systems and policies. Additionally, the Council removed the Commission’s initial proposal to link variable remuneration to directors’ contributions to sustainability efforts.
In contrast, MEPs may lean towards expanding the scope of the CSDDD to encompass a broader array of environmental concerns, potentially including additional obligations related to nature and biodiversity, alongside climate-related objectives.
The CSDDD is expected to enter trilogue negotiations later in 2023, with the goal of adopting the directive by 2024. However, its rules are not anticipated to become applicable until at least 2025.