EU Corporate Sustainability Due Diligence Directive: A New Era for European Businesses

Proposed by the European Commission in 2022, the EU Corporate Sustainability Due Diligence Directive (CSDDD) has finally reached the end of the legislative process, with the publication in the Official Journal on the 5th of July and entry into force on the 25th of July.

This means that it is now time for us to take a closer look at the legislation’s final text and analyse its complex, and yet highly promising, implications.
In this article, I will take you through the most important aspects of the CSDDD, including the array of obligations created for EU companies, but also share my best advice for those looking to stay competitive in the face of this major legislative change.

Want someone with deep experience and connections in the EU to help guide your sustainability strategy? Get in touch!

The CSDDD: Understanding The Basics

The EU Corporate Sustainability Due Diligence Directive is a crucial element of the Green Deal, designed to ensure that environmental and social sustainability becomes a core value within European corporate operations globally. It requires companies to know how their goods are manufactured, proving that they are in no way a product of environmental or human rights violations.

As mentioned in our recap of the 2019-2024 EU mandate, the CSDDD comes to raise the accountability bar for EU businesses. Along with other initiatives such as he EU Deforestation Regulation, the Corporate Sustainability Reporting Directive (CSRD), and the EU Forced Labour Ban Regulation, the Directive significantly strengthens the bloc’s comprehensive approach to sustainability.

The Scope of The Legislation

The CSDDD will directly affect approximately 5,500 companies across all sectors of the economy, which accounts for roughly 0.05% of all businesses operating in the EU. As explained in our last update on the CSDDD, the scope of the legislation has been substantially narrowed compared to the initial proposal. However, it’s safe to say that it will create a strong domino effect, indirectly impacting an exponential number of businesses that are part of the supply chains of the companies in scope of the legislation.

Who is Under The Scope of CSDDD?

• EU (parent) companies: With more than EUR 450 million net turnover worldwide and more than 1,000 employees.
• Non-EU (parent) companies: With a net turnover in the EU of more than EUR 450 million.

Implementation Timeline

• July 2024: Entry into force.
• July 2026: Transposition into national law.
• July 2026: Supervisory authorities in Member States designated.
• From July 2027: Staggered entry into application.

Entry into Application Schedule

• 2027: Entry into application for very large EU companies (> 5,000 employees and EUR 1.5 billion turnover) and Non-EU companies (EUR 1.5 billion turnover).
• 2028: Entry into application for large EU companies (> 3,000 employees and EUR 900 million turnover) and Non-EU companies (EUR 900 million turnover).
• 2029: Entry into application for large EU companies (> 1,000 employees and EUR 450 million turnover) and Non-EU companies (EUR 450 million turnover).

Obligations for EU Companies

The CSDDD creates supply chain due diligence obligations for organisations within its scope which, in my view, will push towards a much-needed holistic approach to preventing and tackling human rights violations and environmental impacts in companies’ own operations and their supply chains.

Importantly, companies are required to create and implement a transition plan for climate change mitigation. The plan must aim to ensure that the company’s business model and strategy are compatible with the transition to a sustainable economy and with limiting global warming to 1.5 °C in line with the Paris Agreement.

The scope of Due Diligence Obligations

As previously mentioned, the CSDDD’s obligations encompass not only the businesses within its scope, but also a subset of their upstream and downstream activities, which you can see in the infographic below.

The legislation outlines the details of the due diligence process based on the well-known 6-step process developed by OECD which involves:

1. Embedding responsible business conduct into policies and management systems.
2. Identifying and assessing adverse impacts in operations, supply chains, and business relationships.
3. Ceasing, preventing, or mitigating adverse impacts.
4. Tracking implementation and its results.
5. Communicating how impacts are addressed.
6. Providing for, or cooperating in, remediation when appropriate.

Addressing Adverse Impacts

While addressing negative impacts, different actions are expected from companies depending on the source of the impact:

• If the company is the one causing the adverse impact, it must end or minimise it.
• If the impact is caused by a business partner, the company should use its influence to prevent or mitigate it.

Engagement with the actors in the supply chain and supporting them in preventing and tackling the adverse impacts is key. Disengagement should be considered as a last resort. In case the negative impacts of the disengagement is more severe than the adverse impact itself, the company has justified reasons to continue working with the partner. Below you can see the steps which EU companies should take to tackle negative impacts and how to approach disengagement.

Minimising The Effects on SMEs

The CSDDD text also considers its potential impacts on smaller organisations in the supply chains, protecting SMEs from disproportionate requirements, and forbidding the transferring of due diligence obligations without proper support by larger business partner companies.

For example, it establishes that contractual assurances from SMEs must be fair, reasonable, and non-discriminatory, and that SMEs should not cover costs for audits. They should also be entitled to receive appropriate support from partner companies, including financial support, if compliance would jeopardise the viability of the SME.

Additionally, Member States are expected to provide support in different forms to affected SMEs.

The Matters of Administrative Supervision and Liability

According to the CSDDD, EU nations must introduce effective, proportionate, and dissuasive penalties for non-compliance. Supervision will occur at the Member State level, with each state appointing one or more supervisory authorities to assess compliance.

These authorities will have investigatory powers and can impose fines and other sanctions. EU companies will be liable for damages caused by their intentional or negligent failure to take remedial or corrective action, but only for impacts of their own fault.

Despite being a comprehensive piece of legislation, the CSDDD is still missing a range of guidelines that will be developed by the European Commission over the next few years to support companies in achieving compliance, as shown below:

Strategic Recommendations for in-scope Businesses

To successfully navigate the complexities of the CSDDD, while also getting ahead of the competition, my advice would be to consider the following strategies:

1. Go Beyond Compliance: Don’t turn compliance into a mere box-ticking exercise. The minimalist approach might create more work in the end trying to chase the requirements of different jurisdictions and open the doors for litigation. Develop an ambitious approach to sustainability and due diligence in your operations globally based on UN Guiding Principles for Business and Human Rights and OECD Due Diligence Guidance for Responsible Business Conduct. Look for differentiation and growth opportunities that the CSDDD can bring.
2. Be aware of interconnections: Check for linkages between the CSDDD’s requirements with other legislation, such as CSRD, forced labour ban, batteries regulation, deforestation regulation and others. If you are in scope for several of the laws, come up with a holistic approach, rather than looking at the compliance for each. Additionally, make a thorough mapping of what you are doing already, as some of the laws are based on international frameworks in place for some time.
3. Involve Stakeholders: Foster open communication with stakeholders, including employees and their representatives, suppliers, and affected communities. Stakeholder engagement is key in identifying, prioritising and addressing impacts and providing remediation. Regular engagement helps keep everyone on the same page, identify potential risks early, and build trust.
4. Invest in Training and Capacity Building: Things run smoother when people feel secure in what they are doing, so equip your team with the necessary skills and knowledge to implement the requirements effectively. This includes training on human rights, environmental standards, as well as on new technology and compliance procedures. Equally important is to provide support to your partners in the supply chain, especially SMEs.
5. Get Professional Help: The CSDDD is the first legislation of its kind and will require a learning approach from all the actors in these crucial years leading to the start of obligations for companies in 2027. Collaborative efforts will be key, as we are figuring out the most effective modalities of its implementation. At the same time, each company situation is unique and successfully implementing the obligations within each company prompts a customised approach. Rely on a specialised consultancy, such as Ohana, that can help you get things right the first time through tailored sustainability and public affairs strategy services.

By building on these points, European businesses and non-European businesses operating in the EU can not only comply with the CSDDD, but also position themselves as sustainability leaders and gain a competitive edge in our fast-evolving market.

Want someone with deep experience and connections in the EU to help guide your sustainability strategy? Get in touch!

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