Last Wednesday, April 24, after years of negotiations, the Corporate Sustainability Due Diligence Directive (CSDDD) was passed by the European Parliament. The CSDDD, also known as the anti-snooping law, regulates at the European level that companies are obliged to know their value chain and 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, or due diligence. This principle is based on the OECD Guidelines for Multinational Enterprises and the United Nations Human Rights and Business Principles. In short, due diligence means conducting thorough investigations to identify environmental and human rights abuses (think slavery, child labor and environmental pollution) and taking appropriate action to prevent and, if necessary, address such abuses.
The CSDDD mandates due diligence and also specifies how companies must conduct research and report on it. The CSDDD thus goes further than the CSRD. For whereas the CSRD was only about reporting, CSDDD requires companies to actually take action.
Specifically, the new European law expects companies to take eight steps to prevent and address wrongdoing in the chain:
- Integrate due diligence into their policies and risk management systems
- Identify and assess actual or potential adverse effects and, if necessary, prioritize actual and potential adverse effects
- Preventing and mitigating potential negative impacts, and ending actual negative impacts and minimizing their magnitude
- Addressing actual adverse effects
- Conducting meaningful consultations with stakeholders
- Establish and maintain a notification mechanism and grievance procedure
- Monitor the effectiveness of their due diligence policies and measures
- Communicating publicly about due diligence performance
Climate Transition Plan
A second element of the CSDDD is the mandatory preparation (and implementation) of a climate transition plan. In this plan, a company must align its business activities with the transition to a sustainable economy and with the goal of limiting global warming to 1.5°C.
Such a 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 include clear and time-bound targets in this area.
Here again, the CSDD is about an obligation of effort and not an obligation of result. Enforcement will therefore not be done by measuring the tons 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, penalties and procurement policy
Although the third D in the CSDD stands for directive, which in Dutch means guideline, the effort and due diligence guidelines in the law are anything but non-binding. Indeed, when companies fail to follow due diligence guidelines and, for example, look away from wrongdoing or inadequately identify risks, they will be held liable and face penalties.
These penalties will take the form of a fine proportional to the company’s (global) turnover. Calculating risk and including the fine as a business risk in strategic considerations for breaking the law is thus no longer an option.
In addition to a fine, companies that violate the CSDD can also be excluded from procurement procedures. For example, the Dutch government will soon include as a hard requirement in tenders that companies have their due diligence in order.
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 violation of due diligence requirements is found, companies are given a reasonable time to take corrective action, but that is not enough to avoid a fine. In short, time to take action.
Scope and introduction of CSDDD
For now, the above three sections (“things”) will only apply to very large companies. The scope of the law is as follows:
- European companies with more than 1,000 employees and global net sales of more than EUR 450 million;
- Non-European companies with an annual turnover of 450 million euros in the EU;
- 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 the full scope of the law is reached, 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 euros;
- From 2028 for companies with more than 3,000 employees and a global turnover of 900 million euros;
- As of 2029 for all other companies within its scope.
What does the CSDDD mean for my organization?
Like the CSRD now, the CSDD will have a major impact on how companies do business. This applies primarily to the largest companies, of course, but it will also logically affect all companies in the supply chain of these largest companies. And even more than the CSRD, the CSDDD requires major efforts by directors to actively identify ESG risks and address wrongdoing.
Do you fall under the scope of the CSDDD? Or do you do business with companies that will soon be subject to CSDDD? Then now is the time to start preparing and integrating due diligence into your business processes. Want to know more? Click here for more information or contact us.