On 24 February, the European Commission adopted and published the long-awaited proposal on supply chain due diligence with a focus on potential and actual adverse impact on human rights and environmental aspects. If your business meets one of the criteria below, the following article on the Corporate Sustainability Due Diligence Directive (CSDDD) is of interest to you.
This article is also published on: duurzaam-ondernemen.nl
Small and medium-sized companies (SMEs) were explicitly excluded from this directive, but they will likely be affected by it as part of the large companies’ value chains. In this role, they will need to support the reporting companies to fulfil their duties deriving from this regulation.
The CSDDD in a nutshell
The CSDDD aims to promote responsible corporate behaviour on human rights and to protect the environment by implementing respective mitigation processes.
What business will need to do
The directive is two-folded and covers due diligence obligations and actions to fight climate change.
- Due diligence obligations
The corporate obligations cover a due diligence exercise conducted by your company on the international agreements on human rights and environmental conventions as outlined in the annexe of the directive. Thereby, the due diligence not only needs to be conducted at your own operations and your subsidiaries worldwide but also with companies along the value chain your organisation has an “established business relationship” with. In this context, your “value chain” covers all upstream and downstream activities of your operations: it includes the sourcing of the necessary input materials your business needs to create your product, the following distribution and storage until up to the end of your products’ life cycles. An “established business relationship” is given when your company’s supply relationship is lasting in terms of intensity and duration and does not represent a negligible or ancillary part of the value chain. If a direct business relationship is determined as “established”, this directive also applies to all linked indirect business relationships. Both definitions will require further clarification by the regulators as the due diligence scope is not yet transparent enough to be easily applicable in practice.
Once your company defined the scope for the due diligence obligations it needs to conduct the following steps:
Complying with this process will affect nearly all aspects of your operations and extended inter-departmental collaboration. Additionally, increased cooperation and communication with your business partners in your defined value chain will also be necessary. Thereby, your company also needs to evaluate how it would like to interact with the indirect business partners: either directly or by a cascading process through your direct business partners. Another challenge will probably be to obtain the necessary information for the due diligence exercise in some countries outside of the EU. The legislators will hopefully provide further guidance on this topic.
Special attention should also be paid to the due diligence steps 2 to 4 and the mentioned “appropriate measure” concept. This is basically a best-effort approach, i.e., the measures undertaken by your organisation should achieve the goal of the due diligence obligations and be reasonably applicable for your company. The influence sphere of your company in this regard covers on the one hand relationships where you have a reliable influence through ownership/market power, pre-qualification mechanisms and setting respective business incentives, and on the other hand, where your power is less pronounced, through reasonable cooperation and engagement with the business relationships with adverse impact.
The directive also emphasises the duties of directors concerning the due diligence obligations. Directors will be responsible for the implementation of the due diligence actions in their companies, to include them into the management systems, adopt the corporate strategy to potential/actual impacts identified and measures undertaken and thereby consider stakeholders’ input while acting in the best interest of the company.
Readers of this article who are familiar with “OECD Guidelines for Multi-National Enterprises” probably have spotted the similarities with this directive. The similarities are indeed given and businesses that have already adopted the OECD Guidelines will have a head start in implementing the CSDDD.
- Climate goal obligations
Once again, the EU further strengthens the set climate goals for 2050. Companies of group 1 shall develop a plan to ensure that the companies’ business model and strategy are in line with the Paris Agreement, i.e., that they contribute to limiting global warming to 1.5° C.
In case the climate is identified as either a principal risk for or has a principal risk impact, your organisation should define respective emission reduction goals and meeting these goals should be taken into account in your company’s directors’ variable remuneration if it is linked to their contribution to the companies’ strategy, long-term interest and sustainability.
There are also overlaps with the proposed Corporate Sustainability Reporting Directive (CSRD) last year. Most likely, EU companies of groups 1 and 2 not only need to comply with the CSDDD but also report in this regard under the CSRD. The CSRD thereby complements the CSDDD and creates synergies on the climate goal part as the information gathering tasks including setting up respective processes aligns with the CSRD reporting requirements.
Opposite to the CSRD that requires a limited assurance by a third party on your company’s reporting, the CSDDD does not provide for a similar independent assessment for non-EU companies in scope and the due diligence obligation by EU companies part so far.
Although this directive will be presumably perceived by some companies as a further administrative burden, it will also create a level playing field that will facilitate doing business across EU borders as some EU countries have already implemented or have started designing comparable regulations but with different standards. These different standards would have made it for cross-border businesses cumbersome to comply with them on a local level but will probably now amended to the EU directive.
Due to the complexity and far reach of this directive, businesses are well-advised to start soon with the set-up and implementation of the respective processes as once this directive is adopted by the European Parliament and Council, the EU member states have two years to translate the directive into national law. Group 1 companies will then need to comply with it (presumably in 2025/2026) and group 2 companies two years later.
 High-impact sectors thereby cover, among others, the manufacturing and wholesale activities in the wider textile industry, basic metal and non-metallic products, the complete primary sector (e.g., agriculture) the food and beverage industry, the extraction of mineral resources (e.g., crude petroleum, natural gas, coal) and the manufacture of basic metal products, other non-metallic mineral products and fabricated metal products, the wholesale trade of mineral resources, basic and intermediate mineral products (including metals and metal ores, construction materials, fuels, and chemicals).