News and developments
Understanding the legal aspects of the EU Directive on Corporate Sustainability Due Diligence
The Corporate Sustainability Due Diligence Directive (CSDDD) is a significant step towards promoting sustainable and responsible business practices and more transparent company operations. This Directive completes the Corporate Sustainable Reporting Directive (CSRD) from December 2022, which updates the process of how and what companies report in their non-financial statements, according to European sustainability standards.
Approved by the Council recently and by the European Parliament in April 2024, this directive mandates large companies operating within the EU to integrate the safeguarding of human rights and environmental due diligence into their operations and global value chains. The new rules will ensure that companies in scope address the adverse human rights and environmental impacts of their actions in- and outside Europe.
This Proposal highlights the key aspects of the CSDDD, its most important implications for businesses, and the expected outcomes for various stakeholders, including customers.
Authors: Pál Belényesi , Dávid Adamov and Robert Szuchy
- Background and Legislative Journey
- Scope and Applicability
- Core Requirements of the CSDDD
-
- Risk-Based Due Diligence: Companies must develop and implement – and must of course bear the costs of such developments – a due diligence policy that integrates human rights and environmental considerations. This policy should include procedures for identifying, assessing, and addressing actual and potential adverse impacts across the company’s operations, subsidiaries, and value chains. In-scope companies must develop a so-called climate transition plan, too, showing that the company’s business model is compatible with the transition to a sustainable economy and with the limiting of global warming. Businesses must also bear transition costs, including expenditure and investments to adapt a company’s own operations and value chains to comply with the due diligence obligation.
- Stakeholder Consultation: Meaningful engagement with stakeholders – through a transparent complaints’ procedure –, including employees, affected communities, and civil society organizations, trade unions, workers’ representatives, is required throughout the due diligence process.
- Prevention and Mitigation: Companies are required to take appropriate measures to prevent or mitigate identified adverse impacts. These measures should be proportionate to the severity and likelihood of the impact and may include contractual clauses, training, financial support for SMEs, and, as a last resort, terminating business relationships if necessary.
- Remediation: If a company causes or contributes to an adverse impact, it must provide remediation to restore affected persons, communities, or the environment to a state as close as possible to the pre-impact situation. Remediation can involve compensation, rehabilitation, and other forms of support.
- Monitoring and Reporting: Companies must refresh their due diligence assessments annually and publish an annual statement detailing their due diligence processes, findings, and actions taken. This promotes transparency and accountability, allowing stakeholders to make informed decisions.
- The CSDDD is also important for financial market participants, to be read together with the Sustainable Finance Disclosures Regulation from 2019, in as much as their reporting obligations concern only upstream activities.
- Enforcement and Compliance
- Implications for Businesses
-
- Increased Legal Certainty and Uniformity: The directive provides a harmonized legal framework across the EU, reducing the fragmentation of national due diligence regulations and creating a level playing field for businesses. This uniformity is expected to enhance legal certainty and reduce compliance costs for companies operating in multiple EU countries.
- Enhanced Reputation and Trust: By demonstrating a commitment to human rights and environmental sustainability, companies can build greater trust with customers, investors, and employees. This can lead to increased customer loyalty, better access to finance, and a more motivated workforce.
- Risk Management and Competitiveness: Implementing robust, well-established, documented and prepared due diligence processes can help companies identify and mitigate risks early, reducing the likelihood of legal disputes and reputational damage. This proactive approach can also enhance business resilience and competitiveness in a rapidly evolving market,
- Global Influence: The CSDDD sets a high standard for corporate due diligence that could influence international norms and practices. As EU companies implement these requirements, their global business partners may also be encouraged or required to adopt similar standards, promoting sustainability beyond the EU’s borders.
- Practical Implications on Corporate Governance
Authors: Pál Belényesi , Dávid Adamov and Robert Szuchy