Supply chain managers have a lot on their radar—literally—with weather and climate-related events regularly posing challenges. The regulatory landscape is changing too, as we pointed out in our March 2023 blog on the EU ban on goods made with forced labor and the U.S. Uyghur Forced Labor Prevention Act.
Now another broad directive is on the way, and once it passes, it will introduce due diligence requirements for roughly 17,000 companies operating in the EU. The directive will prompt businesses to examine their operations and supply chains, and those of their subsidiaries, for any negative environmental and social impacts. Read on to learn about the EU’s Corporate Sustainability Due Diligence Directive (CSDDD).
What Is the Corporate Sustainability Due Diligence Directive?
The European Commission released its proposal for the directive in February 2022, and its adoption is expected later this year. The objective of the directive is “…to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance.” Assuming its passage, this directive will require companies to conduct due diligence in their operations and those of their subsidiaries—as well as in their supply chains—to detect (and remediate) negative environmental, social and governance (ESG) impacts.
More specifically, the proposed directive demands that companies identify and bring to an end any negative human rights and environmental impacts associated with their operations and value chains. They must do the same among their subsidiaries. And they must prevent and mitigate potential impacts, as well as publicly account for their due diligence efforts. Finally, companies need to establish channels that allow workers and other stakeholders to report concerns. The processes for investigating and responding to those concerns must be created as well.
The directive also identifies duties for the directors of in-scope companies. They have to plan and oversee the implementation of due diligence processes and incorporate due diligence into their corporate strategies. They are also expected to consider the human rights, climate change and environmental consequences of their business decisions.
As an important component of the European Green Deal, the CSDDD obligates certain large companies to ensure that their business strategy aligns with the Paris Agreement goal of limiting global warming to 1.5 degrees Celsius.
Negative Impacts Targeted by the CSDDD
To achieve strong ESG performance, companies need to consider the many effects and consequences of their operations as they relate to environmental, social and governance matters. In particular, the CSDDD aims to ensure that any negative impacts and consequences are identified and addressed. Examples of these are forced labor and child labor, poor working conditions, inadequate waste management, pollution and greenhouse gas (GHG) emissions. The effort needed to uncover and rectify these impacts grows exponentially when supply chains are included along with a company’s own operations.
Supply chains stretch across developing as well as developed countries, and the European Commission predicts that greater protection of human rights, more sustainable investments and improved living conditions in developing countries will result from the enforcement of the CSDDD.
Which Companies Fall Within the Scope of the CSDDD?
The CSDDD will apply to companies in the EU, including foreign companies with operations in the EU.
Large EU Limited Liability Companies (LLCs):
- Group 1 – Companies with at least 500 employees and a net turnover of EUR 150+ million worldwide. There are roughly 9,400 companies in this category.
- Group 2 – Companies in high-impact sectors such as textiles, agriculture and extraction of minerals with 250+ employees and a net turnover of EUR 40+ million worldwide. There are approximately 3,400 businesses in this category, and CSDDD rules will come into effect for them two years after they kick in for Group 1 companies.
- Third-country companies that have operations in the EU with turnover thresholds (generated in the EU) equal to the thresholds identified for the EU Group 1 and Group 2 companies. It is estimated that the CSDDD will apply to approximately 4,000 non-EU companies.
While the CSDDD does not apply to micro companies, they can still be affected, particularly if they are supply chain partners of the larger companies that fall within its scope. This is true for smaller supply chain partners both in and outside the EU.
How Will the CSDDD Be Enforced?
According to the European Commission, the CSDDD will be enforced through authorities in EU member states that will supervise and levy proportionate sanctions, which can include fines and compliance orders. To ensure a coordinated approach among member states, the Commission will create a European Network of Supervisory Authorities. Member states will also be responsible for making sure that victims are compensated for any negative environmental or human rights impacts or consequences.
Greater Due Diligence Brings Better ESG Performance
The CSDDD and the EU’s Corporate Sustainability Reporting Directive (CSRD) are both part of the EU’s effort to drive more sustainable and responsible corporate behavior. While companies must disclose their negative environmental and social impacts through the CSRD, the CSDDD compels them to address these impacts. Together, the reporting and due diligence directives seek to bring an end to the harmful effects and consequences of corporate operations as well as those associated with companies’ supply chains.