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LOUIS FRANK 5 July 2024

The Countdown Begins: A Guide to the EU's Upcoming Corporate Sustainability Due Diligence Directive (CSDDD)

The Corporate Sustainability Due Diligence Directive (CSDDD), recently published, marks a major step towards fostering responsible business conduct within the European Union (EU). This directive outlines a set of obligations for companies regarding their environmental and human rights impact throughout their operations and value chains.

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Key Dates to Remember:

  • Member State Transposition: EU member states will have until July 26, 2026 to transpose the Directive into national law.
  • Phased Implementation: The directive will be implemented in stages based on company size. Companies with more than 500 employees and a global net turnover exceeding €150 million will be the first to comply, starting July 26, 2027. The threshold will decrease over the following two years, gradually encompassing smaller and medium-sized enterprises (SMEs).

What the Directive Will Require:

The CSDDD will introduce several key requirements for businesses operating within the EU:

  • Integration of Due Diligence: Companies will be required to establish robust due diligence processes and integrate them into their existing risk management frameworks. This involves proactively identifying, assessing, and mitigating potential adverse environmental and human rights impacts throughout their operations and value chains. This extends beyond a company's direct activities to encompass subsidiaries and business partners.
  • Stakeholder Engagement and Transparency: The directive will emphasize open communication and engagement with stakeholders, such as NGOs, local communities, and consumers. Companies will need to establish clear procedures for addressing stakeholder concerns and maintain a mechanism for receiving and handling complaints. Additionally, the CSDDD will mandate public reporting on due diligence efforts and their outcomes, fostering transparency and accountability.
  • Enforcement and Penalties: Member states will be obligated to enforce the CSDDD with appropriate penalties for non-compliance. These penalties can include significant financial sanctions, potentially reaching up to 5% of a company's global net turnover. Furthermore, companies failing to comply with financial penalties risk facing public disclosure of their transgressions.

The Road Ahead for Businesses:

While member states have time to transpose the directive into national law, companies are advised to take proactive steps towards compliance well in advance. Here are some key actions businesses can take:

  • Familiarize Yourself with the Directive: Thoroughly read and understand the requirements outlined in the CSDDD.
  • Conduct a Gap Analysis: Assess your current practices and identify areas where your operations might not align with the directive's requirements.
  • Develop a Due Diligence Strategy: Establish robust procedures for identifying, assessing, and mitigating environmental and human rights risks throughout your value chain.
  • Engage Stakeholders: Open communication channels with stakeholders and establish mechanisms for addressing concerns.
  • Develop Public Reporting Processes: Prepare transparent reporting on due diligence efforts to ensure accountability.

The Impact of the CSDDD

The CSDDD is expected to have a significant impact on businesses operating within the EU. By promoting responsible business conduct and supply chains, the directive aims to achieve:

  • Reduced Environmental Impact: Businesses will be incentivized to minimize their environmental footprint throughout their operations and value chains.
  • Improved Human Rights Practices: The directive will encourage businesses to uphold human rights standards within their operations and supply chains.
  • Enhanced Transparency and Accountability: Public reporting on due diligence efforts will foster greater transparency and hold companies accountable for their environmental and human rights impact.
  • A Level Playing Field: The CSDDD aims to create a level playing field for businesses operating within the EU by ensuring all companies are held to the same sustainability standards.

CSDDD vs CSRD: A Tale of Two Directives

The introduction of the CSDDD might lead to some confusion as another EU directive, the Corporate Sustainability Reporting Directive (CSRD), also focuses on corporate sustainability. While both aim to promote responsible business practices, they have distinct goals and requirements:

  • Focus: The CSDDD emphasizes action through due diligence processes to prevent and mitigate environmental and human rights risks. The CSRD focuses on reporting, mandating companies to disclose sustainability information, including environmental, social, and governance (ESG) factors.
  • Scope: The CSDDD primarily targets companies' impacts throughout their value chains. The CSRD applies to companies based on size and requires reporting on their own operations and investments.
  • Outcomes: The CSDDD incentivizes companies to minimize negative environmental and social footprint. The CSRD seeks to improve transparency and comparability of sustainability information for investors and stakeholders.

In essence, the CSDDD and CSRD are complementary directives working in tandem. The CSDDD pushes companies to take concrete actions to minimize their negative environmental and social footprint, while the CSRD ensures transparency and accountability by requiring companies to report on these efforts. Together, these directives represent a significant step towards a more sustainable future for the European Union.