The European Union’s Corporate Sustainability Due Diligence Directive (CSDDD), which received formal approval from the European Council on May 24, obliges companies to own up to the environmental and human rights harms they create and further mandates the implementation of stringent new due diligence measures.
Companies must conduct risk-based assessments to identify, prevent, or remedy “potential and actual” human rights or environmental harms resulting from their operations, subsidiaries, and supply chains. Human rights and environmental harms cover a wide range of areas, including child labor, forced labor, biodiversity loss, pollution, or “destruction of natural heritage” (as defined by the World Heritage Convention).
Companies must also implement several compliance measures, including identifying what adverse impacts they are responsible for, creating a due diligence policy, identifying and evaluating risks, and implementing mitigation strategies and prevention plans.
Human rights and environmental due diligence assessments must be reviewed and refreshed at least annually to assess progress. Additionally, if the company is not already subject to disclosure requirements under the EU’s Corporate Sustainability Reporting Directive (CSRD), it must publish an annual statement on its due diligence processes.
The CSDDD’s requirements apply not only to the company’s operations and those of their subsidiaries, but also throughout the company’s chain of activities – from the upstream production of goods and the provision of services to the downstream distribution, transport or storage of products.
Phased-in approach
The CSDDD follows a phased-in approach, with the first phase expected to begin in 2027 applying to EU companies and group parent companies that have 5,000 employees and €1,500 million in global turnover.
The second phase begins in 2028 and applies to companies with 3,000 employees and €900 million global turnover, and the final phase will begin in 2029 and applies to companies with 1,000 employees and €450 million global turnover
Additionally, beginning in 2029, the CSDDD applies to EU franchisors and licensors where royalties exceed 22.5 million euros; and worldwide turnover exceeds 80 million euros. It also applies to non-EU franchisors and licensors that meet the same thresholds – but as it applies to EU-based thresholds, not worldwide turnover.
Climate transition plan
To reduce the “existential harms and costs of climate change,” the CSDDD states that companies should adopt a transition plan for climate change mitigation. In part, companies should ensure “through best efforts” that their business models and strategies align with the Paris Agreement’s limiting of global warming to 1.5 degrees Celsius and the climate neutrality targets established in Regulation (EU) 2021/1119.
As part of this objective, the CSDDD states that the transition plan should address the company’s exposure to coal-, oil- and gas-related activities, where relevant. The transition plan should include time-bound, climate-change-related targets for 2030 and in “five-year steps up to 2050.” According to the Directive, such targets should be based on “conclusive scientific evidence” and, where appropriate, reduction targets for scope 1, scope 2, and scope 3 greenhouse gas emissions.
Compliance takeaways
Member states have two years to transpose the CSDDD into national law and another year before the obligations apply to the first round of companies.
The risks of non-compliance are significant, with violations carrying fines of up to 5% of their global net turnover and also could bring forth liabilities for damages where the company “intentionally or negligently failed to prevent or mitigate potential adverse impacts or to bring actual impacts to an end or minimize their extent.”
For many companies, compliance with the CSDDD will be a heavy lift. Thus, in-scope companies will want to get started on their human rights and environmental due diligence obligations now.
Educate employees and stakeholders on CSDDD compliance. Train and educate relevant stakeholders on the provisions and implications of the CSDDD. Training should address the regulatory framework, emphasizing the importance of sustainable business practices, and the consequences of non-compliance.
Develop comprehensive due diligence policies. Establish comprehensive human rights and environmental due diligence policies as highlighted in the CSDDD. These policies should be a cross-functional effort, developed in consultation with all business functions and senior leaders.
Regularly assess and monitor actual and potential environmental and human rights harms. Compliance and other stakeholders should regularly assess and monitor for risk areas including child labor, forced labor, and environmental harm. The scope of risk assessments must apply to the company’s internal operations, its subsidiaries, and its supply chain. In practical terms, companies will have to map out their entire global chain of activities, taking a risk-based approach. The CSDDD further highlights the importance of conducting “meaningful engagement with stakeholders throughout the due diligence process.”
Prevent or mitigate adverse environmental and human rights impacts, and remediate. Under the CSDDD, “remediation” means restoring affected persons, communities, and/or the environment “to a situation equivalent or as close as possible to the situation they would have been in had the actual adverse impact not occurred.” The CSDDD further encourages companies to engage in voluntary remediation where its business partners – not the company itself – caused the harm. “The company may also use its ability to influence the business partner causing or jointly causing the adverse impact to enable remediation,” the CSDDD states.
Establish a notification mechanism and complaints procedure. A notification mechanism is separate from a company’s internal reporting system. Both should be made available. The notification mechanism should be publicly available to allow for the reporting of environmental and human rights harms by not just employees, but any impacted person, trade unions, and civil societies.
Follow up with reports that are made. When a complaint is not submitted anonymously, the CSDDD states the reporter “should be entitled to request from the company timely and appropriate follow-up and to meet with the company’s representatives at an appropriate level to discuss actual or potential severe adverse impacts that are the subject matter of the complaint and potential remediation.” Reporters are also entitled to receive an explanation for why a complaint was considered founded or unfounded. If founded, reporters should also be “provided with information on the steps and actions taken or to be taken by the company.”
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