On Feb. 24, 2022, the European Commission adopted and published the long-awaited proposal on due diligence in the supply chain. The focus of these European rules is on the potential negative human rights and environmental impacts of business activities. In short, there will be no more non-commitment and an obligation for organizations to start doing business fairly in accordance with the OECD guidelines. In addition, a company will be obliged to become fully climate neutral. This includes looking at your suppliers. If your company meets any of the criteria below, this article on the Corporate Sustainability Due Diligence Directive (CSDDD) will be of interest to you….
This article was also published at: sustainable-entrepreneurship.com
Reprinted from “Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937,” 23.02.2022[1]
Small and medium-sized enterprises (SMEs) are explicitly excluded from it, but they are likely to be affected by it as part of the value chain of large enterprises. In this role, they will need to support reporting companies in fulfilling their obligations under this regulation.
What should business start doing?
The CSDDD aims to promote responsible corporate behavior on human rights and protect the environment through the application of risk mitigation processes. It is bipartisan, covering due diligence obligations and climate change mitigation measures.
1. Due diligence obligations (Due Diligence).
Business obligations include due diligence by your company on the international human rights and environmental agreements listed in the annex to the Directive. In doing so, due diligence must be conducted not only on your own operations and your subsidiaries worldwide, but also on companies in the value chain with which your organization has an “established business relationship.” In this context, your “value chain” includes all upstream and downstream activities: it includes the sourcing of the materials your company needs to make your product, subsequent distribution and storage until the end of the life cycle of your products. An “established business relationship” exists when your company’s supply relationship is sustainable in terms of intensity & duration and does not represent a negligible or incidental part of the value chain.
If a direct business relationship qualifies as “established,” it also applies to all related indirect business relationships. Both definitions will need further clarification by the EU, as the scope of due diligence is not yet transparent enough to be easily applied in practice. Once your company has determined the scope of due diligence obligations, it should implement the following steps:
Reprinted from: “Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937,” 23.02.2022
Compliance with this process will affect almost all aspects of your operations and interdepartmental cooperation. In addition, more cooperation and communication with your business partners will also be required. In doing so, your company must also evaluate how it wants to interact with indirect business partners (tiers 2 and 3): either directly or through a cascading process through your direct business partners.
Another challenge is likely to be obtaining the necessary information for due diligence in some countries outside the EU. Legislators will hopefully provide further guidance on this issue in the coming year.
Particular attention should also be paid to due diligence steps 2 through 4 and the aforementioned concept of “appropriate action.” This is essentially an effort approach, i.e. the measures taken by your organization must achieve the objective of the due diligence obligations and be reasonably applicable to your company. Your company’s sphere of influence in this context includes, on the one hand, relationships where you have reliable influence through ownership/market power and, on the other hand, where your power is less pronounced, through reasonable cooperation and involvement in the business relationships with adverse consequences.
The CSDDD also emphasizes the duties of directors/management regarding due diligence obligations. Directors will be responsible for carrying out due diligence actions in their companies, to incorporate them into management systems, adapt the corporate strategy to the identified potential/actual impacts and actions taken, taking into account stakeholder input while acting in the best interest of the company.
Readers of this article who are familiar with the “OECD Guidelines for Multinational Enterprises” have probably noticed the similarities. The similarities are indeed there, and companies that have already adopted the OECD guidelines will have a head start in implementing the CSDDD.
2. Climate target commitments
Once again, the EU is strengthening its stated climate targets for 2050. Group 1 companies will develop a plan to ensure that their business model and strategy are in line with the Paris Agreement, i.e. contributing to limiting global warming to 1.5°C.
In the event that climate is identified as one of the key risks or has a significant risk impact, your organization should define emission reduction targets and achievement of these targets should be included in the variable compensation of your company’s executives.
There are also overlaps with last year’s proposed Corporate Sustainability Reporting Directive (CSRD). Most likely, EU Group 1 and 2 companies will not only have to comply with the CSDD but also report on it under the CSRD. The CSRD thus complements the CSDD and creates synergies in the area of climate targets, as the tasks of gathering information, including setting up processes, align with the reporting requirements of the CSRD. Unlike the CSRD which requires limited assurance from a third party on your company’s reporting, the CSDDD does not provide for a similar independent assessment.
While this directive is likely to be perceived as an additional administrative burden by some companies, it will also create a level playing field that will facilitate doing business across EU borders. Some EU countries have already implemented or begun to draft similar regulations but with different standards. These different standards would have made it difficult for cross-border companies to comply with them at the local level, but are now likely to be aligned with the EU directive.
Next steps
Because of the complexity and wide scope of this directive, companies would be well advised to start setting up and implementing the processes quickly, since once this directive is adopted by the European Parliament and the Council, EU member states will only have two years to transpose it into national law. Group 1 companies will then have to comply with it (presumably in 2025/2026) and Group 2 companies two years later.
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* High-impact sectors here include manufacturing and wholesale activities in the broader textile industry, base metal and non-metallic products, the entire primary sector (e.g., agriculture), food and beverage industry, mineral resource extraction ( e.g., crude oil, natural gas, coal) and the manufacture of metal base products, other non-metallic mineral products and fabricated metal products, wholesale trade in mineral resources, mineral base products and intermediate products (including metals and metal ores, construction materials, fuels and chemicals).