Understanding the EU Directive on Corporate Sustainability Due Diligence: A comprehensive guide

The European Union has taken a significant step towards promoting sustainable and responsible business practices with the adoption of the Corporate Sustainability Due Diligence Directive (CSDDD). Approved on 24 April 2024, this directive mandates large companies operating within the EU to integrate human rights and environmental due diligence into their operations and value chains. This article delves into the key aspects of the CSDDD, its implications for businesses, and the expected outcomes for various stakeholders.

Background and legislative journey

The journey to the adoption of the CSDDD began with growing calls from civil society, businesses, and EU citizens for a unified approach to corporate sustainability. Prior to the directive, several national regulations existed, such as France’s Duty of Vigilance Law and Germany’s Supply Chain Due Diligence Act, which highlighted the need for a harmonised EU-wide framework.

On 23 February 2022, the European Commission proposed the directive, which underwent extensive negotiations and revisions. The European Parliament adopted the final text on 24 April 2024, after reaching a compromise with the Council in December 2023. The directive will be published in the Official Journal of the European Union and enter into force 20 days later, giving member states two years to transpose it into national law.

Scope and applicability

The CSDDD applies to large EU companies with more than 1,000 employees and a net turnover exceeding €450m worldwide. It also affects non-EU companies with significant operations in the EU, specifically those generating more than €450m in turnover from their EU activities. Although small and medium-sized enterprises (SMEs) are not directly covered, they may still be impacted as part of the supply chains of larger companies.

Core requirements of the CSDDD

The directive establishes a corporate duty of due diligence that encompasses several key obligations:

1. Risk-based due diligence: Companies must develop and implement a due diligence policy that integrates human rights and environmental considerations. This policy should include procedures for identifying, assessing, and addressing actual and potential adverse impacts across the company’s operations, subsidiaries, and value chains.
2. Stakeholder consultation: Meaningful engagement with stakeholders, including employees, affected communities, and civil society organisations, is required throughout the due diligence process. Companies must ensure that vulnerable stakeholders are given particular attention and barriers to engagement are addressed.
3. Prevention and mitigation: Companies are required to take appropriate measures to prevent or mitigate identified adverse impacts. These measures should be proportionate to the severity and likelihood of the impact and may include contractual clauses, training, financial support for SMEs, and, as a last resort, terminating business relationships if necessary.
4. Remediation: If a company causes or contributes to an adverse impact, it must provide remediation to restore affected persons, communities, or the environment to a state as close as possible to the pre-impact situation. Remediation can involve compensation, rehabilitation, and other forms of support.
5. Monitoring and reporting: Companies must refresh their due diligence assessments annually and publish an annual statement detailing their due diligence processes, findings, and actions taken. This promotes transparency and accountability, allowing stakeholders to make informed decisions.

Enforcement and compliance

The enforcement of the CSDDD will be carried out by national authorities designated by EU member states. These authorities will have the power to impose sanctions, including fines and other penalties, for non-compliance. Additionally, the directive establishes civil liability provisions, ensuring that victims of adverse impacts can seek compensation through legal channels.

At the EU level, the European Commission will set up a European Network of Supervisory Authorities to ensure a coordinated approach to enforcement across member states. This network will facilitate the sharing of best practices and support the uniform application of the directive.

Implications for businesses

The CSDDD represents a paradigm shift in how businesses operate within the EU, with significant implications for corporate governance, risk management, and stakeholder engagement. Key implications include:

1. Increased legal certainty and uniformity: The directive provides a harmonised legal framework across the EU, reducing the fragmentation of national due diligence regulations and creating a level playing field for businesses. This uniformity is expected to enhance legal certainty and reduce compliance costs for companies operating in multiple EU countries.
2. Enhanced reputation and trust: By demonstrating a commitment to human rights and environmental sustainability, companies can build greater trust with customers, investors, and employees. This can lead to increased customer loyalty, better access to finance, and a more motivated workforce.
3. Risk management and competitiveness: Implementing robust due diligence processes can help companies identify and mitigate risks early, reducing the likelihood of legal disputes and reputational damage. This proactive approach can also enhance business resilience and competitiveness in a rapidly evolving market.
4. Global influence: The CSDDD sets a high standard for corporate due diligence that could influence international norms and practices. As EU companies implement these requirements, their global business partners may also be encouraged or required to adopt similar standards, promoting sustainability beyond the EU’s borders.

Benefits for stakeholders

The directive aims to deliver wide-ranging benefits for various stakeholders:

1. For citizens:

• Better protection of human rights, including labour rights.
• Healthier environment for present and future generations, including climate change mitigation.
• Increased transparency and informed consumer choices.
• Improved access to justice for victims of corporate misconduct

2. For developing countries:

• Enhanced protection of human rights and the environment.
• Sustainable investment and capacity building.
• Adoption of international standards and improved living conditions

3. For companies:

• Harmonised legal framework providing legal certainty and level playing field.
• Increased trust from customers and employees.
• Better risk management and competitiveness.
• Attraction of sustainability-oriented investors and talent.

Challenges and criticisms

While the CSDDD is a landmark piece of legislation, it is not without challenges and criticisms. Some businesses have expressed concerns about the potential costs and administrative burden of compliance, particularly for complex global value chains. Additionally, there are concerns about the enforceability of the directive and the potential for inconsistent application across member states.

Moreover, the exclusion of SMEs from the directive’s direct scope has raised questions about the overall effectiveness of the regulation, given the significant role SMEs play in global supply chains. However, the directive includes provisions to support and protect SMEs indirectly affected by due diligence requirements.

Conclusion

The EU Directive on Corporate Sustainability Due Diligence represents a major advancement in promoting sustainable and responsible business practices. By mandating comprehensive due diligence for large companies, the directive seeks to address adverse human rights and environmental impacts, fostering a more sustainable and equitable global economy.

As the directive is transposed into national laws and companies begin to implement its requirements, the true impact of the CSDDD will become clearer. While challenges remain, the directive’s emphasis on transparency, stakeholder engagement, and remediation offers a robust framework for driving positive change in corporate behaviour.

In the long term, the CSDDD has the potential to set new global standards for corporate sustainability, influencing practices beyond the EU and contributing to a more sustainable future for all. Businesses, policymakers, and civil society must work collaboratively to ensure the successful implementation and enforcement of this groundbreaking directive, realising its full potential to benefit people and the planet.