CSDDD: 3 key point of this new European sustainability law

Last Wednesday, April 24^th, the Corporate Sustainability Due Diligence Directive (CSDDD) was adopted by the European Parliament after years of negotiations. The CSDDD regulates that companies are obliged to conduct risk-based human rights and environmental due diligence in their own operations and in their value chain and also take action the moment they discover wrongdoing. This is enforced with sanctions for violation. In addition, the ‘CS-triple-D’ mandates a climate transition plan.

Due diligence

Central to the CSDDD is the principle of due diligence. This principle is based on the OECD Guidelines for Multinational Enterprises and the United Nations Human Rights and Business Principles. In a nutshell, due diligence means conducting thorough research to investigate environmental and human rights abuses (such as forced labour, child labour and environmental pollution) and taking appropriate measures to prevent and address such abuses.

The CSDDD mandates due diligence and specifies how companies should conduct research and report on it. The CSDDD thus goes further than the CSRD. Whereas the CSRD only requires reporting, CSDDD requires companies to actually take action.

Specifically, the new European law expects companies to take action on the following eight steps to prevent and address wrongdoing in the chain:

1. Integrating due diligence into their policies and risk management systems;
2. Identifying and assessing actual or potential adverse impacts and, where necessary, prioritising potential and actual adverse impacts;
3. Preventing and mitigating potential adverse impacts, and bringing actual adverse impacts to an end and minimising their extent;
4. Providing remediation to actual adverse impacts;
5. Carrying out meaningful stakeholder engagement;
6. Establishing and maintaining a notification mechanism and complaints procedure;
7. Monitoring the effectiveness of their due diligence policy and measures; and
8. Publicly communicating on due diligence.
   

Climate transition plan

A second element of the CSDDD is the mandatory preparation of a climate transition plan (and its implementation). This plan requires a company to align its business activities with the transition to a sustainable economy and with the goal of limiting global warming to 1.5 °C.

The plan should include how the company deals with activities related to fossil fuels and how the company ensures that its (scope 3) carbon footprint is reduced. In addition, the plan must contain clear and time-bound targets in this area.

Here, too, the CSDDD is an obligation of effort and not an obligation of result. Enforcement will therefore not be done by measuring the tonnes of CO2 coming out of suppliers’ chimneys, but by assessing (scientifically) the extent to which a company’s plans are in line with the Paris climate agreement and what measures the company is taking to implement the plan.

Liability, sanctions and procurement policy

Although the third D in the CSDDD stands for directive, which may sound like a voluntary guideline but in practice this is anything but non-binding. In fact, if companies fail to follow the due diligence directive and, for instance, look away from wrongdoing or inadequately identify risks, they will be held liable for this and face penalties.

These penalties will be in the form of a fine proportional to the net (global) turnover of the company. Calculating risk and including the fine as a business risk in strategic considerations to break the law is thus no longer an option.

Besides a fine, companies violating the CSDDD can also be excluded from procurement procedures. For example, the Dutch government will soon include the requirement in tenders that companies have their due diligence actively in place.

To determine if there is a violation of due diligence requirements, a number of things are taken into account such as the company’s relationship to the negative impact, the degree of cooperation with partners to combat the negative impact, etc. If a company fails to meet the due diligence requirements and is held liable, they are given a reasonable time to take corrective action, however that is not enough to avoid a fine. In other words, time to take action.

Scope and timeline for introduction of the CSDDD

For now, the above three cases will only apply to very large companies. The scope of the law is as follows:

1. European companies with more than 1,000 employees and a worldwide net turnover of more than EUR 450 million;
2. Non-European companies with an annual turnover of EUR 450 million in the EU;
3. Companies that do not reach the thresholds referred to in a) and b) but are parent companies of a group that has reached those thresholds.

Before reaching the full scope of the law, it will be phased in:

• From 2027, for companies with more than 5,000 employees and a global turnover of more than €1,500 million;
• From 2028, for companies with more than 3,000 employees and a global turnover of €900 million;
• From 2029, for all other companies within the scope of the directive.

What does the CSDDD mean for my organisation?

Like the CSRD now, the CSDDD will have a major impact on how companies do business. This applies primarily to the largest companies, of course, but it will also affect all companies in the supply chain of these largest companies. And even more than the CSRD, the CSDDD requires great efforts from directors to actively identify ESG risks and address wrongdoing.

Is your company in scope of the CSDDD? Or do you do business with soon-to-be CSDDD-compliant companies? Then now is the time to start preparing and integrate due diligence into your business processes. Would you like more information on how we at Empact can help you seize value chain opportunities? Contact us today.