The CSDD (the EU’s Corporate Sustainability Due Diligence Directive) heralds new obligations for corporations operating in the European Union (EU). In line with a growing trend towards scrutiny of environmental, social and governance (ESG) considerations throughout companies’ value chains, the CSDD brings challenges for boards, Chief Compliance Officers and their teams.
While supply chain due diligence is not a new issue, the CSDD brings an additional layer of accountability. Compliance professionals will be responsible for managing social and environmental impacts along the entire value chain, including direct and indirect suppliers, their own operations, products and services.
In the course of my work, I have seen my share of challenging human rights situations. These have left me in no doubt that there’s a moral obligation to address ESG issues, and especially human rights abuses, in corporate value chains.
— Ezekiel Ward, founder of North Star Compliance Ltd.
In a whitepaper published last year, Diligent’s partners Steele and Ezekiel Ward, founder of North Star Compliance Ltd., wrote about the draft directive’s implications and noted:
“In the course of my work, I have seen my share of challenging human rights situations. These have left me in no doubt that there’s a moral obligation to address ESG issues, and especially human rights abuses, in corporate value chains.”
To respond effectively, companies will need to implement a program of seamless, comprehensive and global supply chain due diligence.
What Is the Corporate Sustainability Due Diligence (CSDD) Directive?
On 23 February 2022, the European Commission adopted a proposal for a directive on Corporate Sustainability Due Diligence (CSDD).
The directive will require companies in scope to carry out environmental and human rights due diligence throughout their supply chains. In the words of the Commission, the EU supply chain law aims to:
“foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance.”
Importantly, the directive will cover value chains inside and outside Europe, impacting corporations globally. It builds on — and interacts with — other regulations that focus on supply chain ESG, such as the SFDR, which aims to improve transparency in the sustainable investment product market, the Corporate Sustainability Reporting Directive (CSRD) and the German Supply Chain Act.
The EU CSDD underpins the European Union’s focus on driving a climate-neutral approach and increased supply chain sustainability. And it’s in line with corporate priorities; as companies realize the benefits of ESG, not just for the planet and for society, but from a commercial perspective as well. Indeed, a number of businesses in the apparel sector recently signed an open letter supporting the EU in its moves to introduce corporate sustainability due diligence.
What Does EU CSDD Require Companies To Do?
The draft European Commission corporate sustainability due diligence legislation requires in-scope companies to manage their operations' environmental and social impacts along their entire value chain. This means within their own operations, as well as those of their suppliers.
Whatever current [due diligence] setup you have in place, it may need ‘lifting’ or re-positioning to meet the draft directive’s requirements.
— Ezekiel Ward, founder of North Star Compliance Ltd.
The directive covers a broad range of issues that existing due diligence processes might not address. These issues include human rights, social and labor rights, and environmental impacts — essentially the entire ESG spectrum.
Issues like integrity and corruption will be in scope, meaning that, as Ezekiel Ward of North Star Compliance Ltd notes, “Whatever current [due diligence] setup you have in place, it may need ‘lifting’ or re-positioning to meet the draft directive’s requirements.”
Who Is in Scope for EU CSDD?
So, who does the EU Corporate Sustainability Due Diligence Directive apply to?
The Commission proposes that it will be applicable to:
- EU companies with more than 500 employees and a net worldwide turnover of more than €150 million
- EU companies with more than 250 employees and a net worldwide turnover of more than €40 million, if more than half of their net turnover was generated in a high-risk sector (high-risk sectors being: the manufacturing of textiles, leather and related products; agriculture, forestry and fisheries; the extraction and manufacturing of mineral products)
- Third-country (i.e., non-EU) companies that generate a net turnover of more than €150 million in the EU
- Third-country companies that generate a net turnover of more than €40 million in the EU, and where at least half of their worldwide turnover is generated in one of the high-risk sectors identified above
It's important to note that, although small and medium-sized companies do not fall directly into the scope of the EU CSDD, they are impacted indirectly, as they will need to meet standards in their role as suppliers to larger, in-scope businesses.
The EU due diligence directive will cover companies run as stock corporations, partnerships limited by shares, limited liability companies, regulated financial companies and insurance companies.
How Does the EU CSDD Impact Organizations Outside the EU?
Though this directive comes from the EU, it will likely have a ripple effect around the globe, as any company that operates in the EU will need to comply.
As mentioned above, countries not headquartered in the EU are covered by the proposed EU due diligence directive if they meet certain criteria: doing a certain amount of business in the EU and/or making money in specific high-risk sectors.
Any organization meeting those thresholds must comply with the EU due diligence legislation without delay. In-scope third-country companies, for example, must designate an authorized representative within the EU.
Even if you fall out of scope of the EU CSDD, growing pressure to align operations and supply chains with ESG objectives is likely to drive similar legislation in other jurisdictions. Getting your arms around your supply chain and reviewing your compliance with human rights and environmental requirements can only be a positive step.
What Steps Does Your Organization Need To Take To Comply With CSDD?
In-scope companies must take the following steps to comply:
- Identify any actual or potential negative impacts on the environment and human rights within your operations and along your value (supply) chain.
- Put in place measures to prevent, mitigate and remediate these impacts.
- Fully integrate your supply chain due diligence into your company policies, management systems and internal controls.
- Implement a complaints procedure that everyone along your supply chain can access.
- If your annual turnover is more than €150 million, you must outline a transformation plan that intends to enable you to meet the Paris Climate Agreement emission reduction targets.
- As mentioned above, if you’re an in-scope third-country company, designate an authorized representative located within the EU.
- Publicly report on your organization’s success in fulfilling its supply chain due diligence obligations. This includes including relevant data in your annual report.
Consequences of Noncompliance With CSDD
Failure to comply with the EU CSDD comes with penalties:
- A relevant regulatory authority (designated by the EU Member States) will be able to impose sanctions, including fines and compliance orders.
- Any victims of noncompliance with CSDD obligations will have a right to apply for compensation for damages resulting.
What’s Next for the CSDD?
Now that the EU has adopted the proposal for the corporate sustainability due diligence directive, Member States have two years to transpose it into their respective national laws. It will apply:
Two years after it enters into force:
- For all EU companies with more than 500 employees and a net worldwide turnover of more than €150 million
- For third-country companies with a net EU turnover of more than €150 million
Four years after its entry into force:
- For all other in-scope companies
CSDD Compliance – How Software Can Help
Due diligence software can be invaluable in helping you to comply with supply chain due diligence legislation — including the EU CSDD.
A software-led approach to due diligence will enable you to gather the intelligence you need to make informed decisions and move beyond checkbox compliance with in-depth investigations into all partners along your value chain. Find out more about how due diligence software from Diligent can enhance your approach and ensure you comply with the upcoming EU CSDD along with other due diligence regulations.
