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Corporate Sustainability Due Diligence Directive (CSDDD): A New Era
Specifically, on May 24 of 2024, after a 4-month period of negotiations regarding its enforcement, the European Council gave its final approval of the CSDDD. But what exactly does the CSDDD entail?
The CSDDD aims to promote corporate sustainability and ensure that companies operate responsibly, respecting human, social, and environmental rights in line with ESG principles. It also establishes liability for EU and non-EU companies for violation of those rights though their business operation and those of their business partners in the chains of activities of those companies.
The “chain of activities” includes upstream business partners involved in designing, extracting, sourcing, producing, transporting, storing of raw materials, products or part of products. It also covers downstream business partners responsible for distributing, transporting and storing products for or on behalf of the company. Since the downstream impacts of services are entirely excluded, regulated financial undertakings are only subject to due diligence obligations for the upstream part of their chain of activities. However, the CSDDD envisions the possible introduction of sustainability due diligence requirements for the financial services industry as early as 2026.
Subsequently, an analysis of the CSDDD will be conducted to provide companies with a comprehensive understanding of their new obligations.
- Climate Transition Plan
- Companies that will be affected
- Implementation of the CSDDD in companies
- Step 1: Develop a due diligence policy with employee input outlining the company’s long-term approach. This policy should include a code of conduct, address business partners where relevant, describe integration into policies, and ensure a risk-based approach.
- Step 2: To comprehensively identify and assess adverse impacts, companies should use both quantitative and qualitative data, including available disaggregated data and public reports. Additionally, they should also map their operations, subsidiaries and business partners to pinpoint areas where adverse impacts are most likely and severe. Based on this mapping, companies should conduct in-depth assessments in these high-risk areas.
- Step 3: Companies should take the relevant measures to address adverse impacts by creating corrective action plans and obtaining compliance assurances from business partners. These assurances should be verified and extend through their supply chains. Companies should also invest financially or through non-financial means to in minimise impacts and collaborate with others in compliance with EU Law.
- Step 4: Companies should periodically assess their operations, subsidiaries and business partners to ensure effective identification and mitigation of adverse impacts. These assessments should be conducted at least annually and after significant changes.
- Step 5: To comply with due diligence communication obligations, companies should publish an annual statement on their website in an official EU language, within 12 months after the financial year, unless covered by Directive 2013/34/EU’s sustainability reporting requirements.
- Step 6: If a company causes or jointly causes an adverse impact, it is required to provide remediation. If the impact is caused solely by a business partner, the company may voluntarily provide remediation and use its influence to ensure the partner provides remediation.
- Enforcement
- Civil liability, where companies should be held liable for damages, resulting from their intentional or negligent failure to comply with the provisions of the CSDDD. This clause excludes any liability caused solely by the business partners of a company.
- Administrative supervision, where companies that do not follow the provisions of the CSDDD will face sanctions and penalties by the administrative authorities of the EU Member State, not exceeding 5% of their global turnover.
- Next steps
- Companies with more than 5,000 employees and €1,500 million global net turnover will be affected in 2027.
- Companies with more than 3,000 employees and €900 million global net turnover will be affected in 2028.
- Companies with more than 1,000 employees and €450 million global net turnover will be affected in 2029.
- Conclusion