Prepare your business for the CSDD & its upcoming rules
Even before the CSDD proposal gets the green light, you’ll need to start planning how to comply with these sustainability due diligence duties.
The Corporate Sustainability Due Diligence (CSDD) Directive is officially on the table. And in front of EU companies, hard-and-fast rules for being a sustainable business. This move by the European Commission supports its transition towards a sustainable financial system and aims to promote sustainable and responsible business conduct in the EU. Whether you’re already familiar with due diligence practices or not, soon you’ll need to understand how this proposal brings them to a new level across the EU. Below, we explain the proposal’s major points and how they can impact your operations.
Why do we need the CSDD directive?
First of all, what is corporate sustainability due diligence all about? To put it simply, it concerns companies’ responsibilities regarding environmental and human rights adverse impacts that result (or could) from their business activities. This includes those from their subsidiaries and their value chains.
Actually, regulating sustainability due diligence obligations is not completely new in Europe. Indeed, certain EU countries (such as France and Germany) have already adopted legislation on this topic, while others are working on similar proposals, including Austria, Belgium, and Italy. However, the current fragmentation of due diligence requirements creates uncertainty and makes compliance more difficult.
The current fragmentation of due diligence requirements makes compliance more difficult.
How could common EU rules be beneficial for companies?
While many standards on responsible business behavior already exist at the international level (such as the 2011 United Nations Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Entreprises, just to name a few), complying with them remains voluntary.
The current situation creates an uneven playing field for companies in the single market that, on the one hand, are under increased market pressure to protect human rights and the environment across their operations and value chains. But, on the other hand, the lack of common ground rules at EU level creates a challenge in understanding how to take concrete steps to do so.
If the CSDD proposal is adopted, companies would benefit from a clearer set of rules to identify and manage adverse environmental and human rights risks and impacts arising from their activities or value chains, which would made compliance with sustainability (ESG) reporting way easier.
Which companies would be affected by CSDD?
The CSDD’s due diligence obligations would apply to the following large EU and non-EU companies operating in the single market:
Large EU limited liability companies with either:
- more than 500 workers on average and a net worldwide turnover of more than EUR 150 million in the last financial year or
- more than 250 workers on average and a net worldwide turnover of more than EUR 40 million in the last financial year (provided that such turnover was generated in any of the high-impact sectors specified by the proposal, such as the manufacture of textiles, basic and fabricated metal products).
Large non-EU companies with either:
- a net worldwide turnover of more than EUR 150 million in the EU in the financial year preceding the last financial year
- a net worldwide turnover of more than EUR 40 million in the EU in the financial year preceding the last financial year (provided that at least 50% of that turnover was generated in any of the listed high-impact sectors)
Although companies falling under the above thresholds only represent 1% percent of all EU businesses, small and medium-sized enterprises (SMEs) would also be impacted, at least indirectly. This is the case if they have an established business relationship with a large company (for instance, if they’re part of its value chain).
What would companies be expected to do?
To comply with the proposed human rights and environmental due diligence duty, companies would be required to incorporate due diligence into their business ethic, policies, and actions.
First comes policy.
In practice, this means that companies would have to develop (and update every year) a corporate due diligence policy, where they provide their vision on due diligence, a code of conduct for their workers and subsidiaries, and the concrete actions taken to implement it in their operations.
In addition, they would be required to identify actual and potential negative environmental and human rights impacts resulting from their activities (including those of their subsidiaries) or related to their value chains. This could be done, for instance, by means of independent audits as well as consultations with potentially impacted groups (including workers and other relevant stakeholders).
Then comes prevention.
Once the potential adverse environmental and human rights effects are identified, companies would have to take all necessary steps to prevent (and, if not possible, mitigate) them. This includes, for instance, the implementation of a prevention action plan or seeking contractual assurance from the companies’ partners.
Any actual negative impacts that could not be prevented would have to be neutralized by the responsible companies (by providing financial compensation or paying damages to the affected communities or persons, just to give an example).
Companies would also need to establish a complaints procedure to ensure that affected persons, workers, and civil society organizations can express their concerns regarding any actual or potential negative environmental and human rights effects derived from the companies’ activities or those of their subsidiaries and value chains.
And regular assessments.
Companies would also be asked to perform periodic assessments (at least once a year) to monitor the effectiveness of their due diligence policy and measures. They’ll also need to publish on their website an annual statement on due diligence (by 30 April each year).
Moreover, large EU and non-EU companies generating a net worldwide turnover of more than EUR 150 million in the EU would have to adopt a plan to ensure that their business model and strategy are compatible with limiting global warming to 1.5 °C in line with the Paris Agreement. The said plan would have to include emission reduction objectives if climate change is identified as a principal risk for, or impact of the companies’ operations.
Last but not least: responsibility.
Finally, the directive also increases companies’ accountability. According to the proposal, companies’ directors would be responsible for:
- implementing and overseeing the company’s due diligence actions;
- reporting the company’s due diligence actions to the board of directors; and
- adapting the corporate strategy to take into account the actual and potential adverse environmental and human rights impacts identified and any prevention measures taken.
The precise rules for implementing due diligence within companies are practical steps towards more sustainable and responsible business in the EU. That is, when everyone will be on board.
When will the CSDD proposal be adopted?
But before all the above obligations become applicable, there’s still some time.
Indeed, the proposal was recently submitted to the European Parliament and Council for approval. But the parliamentary and Council discussions will take some months and will likely lead to some changes on the text itself.
Once adopted, the EU Member States will have 2 years to transpose the directive into their national law. This means that companies still have around 3 years to plan ahead and get prepared.
What can your organization do in the meantime?
Pending the new rules’ entry into force, we advise companies to determine whether they fall under their scope. If so, then check whether any of the EU Member States where they operate has already established sustainability due diligence duties and look for possible synergies with the directive. If that is the case for your company, you can use the due diligence policies already put in place in one of your national branches to build a transnational CSDD strategy.
Get a head start on the CSDD and a more sustainable business.
The CSDD might still be in proposal stage, but companies need to proactively prepare for its changes. Now is the time to review your risk and impact assessment to identify where your business might be misaligned. Take a look at the main environmental and human rights risks and potential or actual adverse effects associated with your activities. Make sure to look across your entire value chain and subsidiaries for anything that could be easily overlooked. That way, you’ll have a better picture of the priority risks and impacts, which puts you in a better position to address due diligence issues in due time.