EU Corporate Sustainability Due Diligence Directive: What it Means for Businesses

Businesses in the EU will soon need greater oversight of their environmental and social impacts with the approval of the Corporate Sustainability Due Diligence Directive (CSDDD).

The Directive was proposed by the EU Council and Parliament to foster sustainable and responsible corporate behaviour. It sets out measures by which human rights and environmental considerations should be embedded into a business’ corporate governance.

The new rules mean businesses must address the broader impacts of their operations – including those of supply chains partners. With penalties incurred by those businesses failing to comply, there’s now a tangible and imminent cost to not conducting business responsibly.

What is the Corporate Sustainability Due Diligence Directive?

The EU Corporate Sustainability Due Diligence Directive (CSDDD) is a regulation requiring companies which conduct business in Europe to identify and mitigate adverse environmental and social effects. These could stem from their own operations, those of their subsidiaries, or from established relationships with supply chain partners.

To achieve this, companies must carry out periodic assessments of processes, policies, and procedures throughout the company’s value chains, with a specific focus on any negative practices concerning human rights or environmental abuses.

The Directive is a response to the difficulty of progressing sustainability and social goals when global supply chains are complex and national rules are fragmented and uneven. This single, unified regulation, applied consistently, is intended to help businesses take up and maintain good practices.

The CSDDD benefits both citizens and companies:

• Citizens enjoy a healthier environment for present and future generations, increased trust in businesses, and more transparency over their purchasing choices.
• Companies have greater awareness of their negative environmental and human rights impacts, and better risk management capabilities.

What are the implications of the CSDDD for businesses?

The Corporate Sustainability Due Diligence Directive applies to EU companies with 1,000 or more employees and EUR 450 million turnover worldwide. It’s expected this will encompass between 5,000 - 5,500 companies.

Non-EU companies are also covered by the Directive if they generate EUR 450 million turnover inside the EU.

Companies affected must integrate due diligence into all their corporate policies. They must have a due diligence policy in place and update this policy annually. This requirement extends to companies’ upstream and downstream activities across their value chains.

Any companies which fail to comply with their obligations under the Directive, and which result in adverse impacts that could have been prevented, will be liable for damages.

Enforcement of the CSDDD will be determined by individual Member States, however the Directive stipulates sanctions for cases of non-compliance, including financial penalties based on annual turnover.

The regulation also provides for civil liability, where Member States are charged to ensure that victims receive compensation for damages resulting from the non-compliance.

What’s the latest update and next steps for the CSDDD?

The Corporate Sustainability Due Diligence Directive was approved by the EU Parliament on April 24, after which it will go for final approval by the EU Council to then be published in the Official Journal of the EU and enter into force. Once adopted, this will create a legal obligation for companies relating to environmental and human rights due diligence within their supply chain.

In order to secure agreement from EU Member States, the Directive underwent significant changes from what was initially proposed. It will also be phased in over a longer period, ranging from 3 years for companies with 5,000 employees and EUR 1,500 million turnover to 5 years for companies with 1,000 employees and EUR 450 million turnover.

It’s estimated that these changes will reduce the number of affected companies by 30% from the initial proposal, equating to around .05% of the total number of businesses operating in the EU.

In addition, the phase-in of companies that fall outside the scope of the Directive but operate in high-risk sectors has been removed.

How does the CSDDD relate to other legislation?

The expected adoption of the CSDDD reflects a heightened emphasis around issues of sustainability and the environment. A growing awareness of the role businesses play in enabling a healthy, fair society has led to a series of regulations introduced across the world.

In the European Union, the CSDDD complements the recently updated EU Directive on product labelling and sustainability, which addresses the use of misleading environmental claims and ‘greenwashing’.

The CSDDD also supports the drive for eco-friendly products and brands, covered in the EU by regulations such as the Green Claims Directive and the Ecodesign for Sustainable Products Regulation, currently under review.

The CSDDD shares some common objectives with the New York Fashion Act in the United States. This legislation, proposed in 2022 and currently under consideration in the New York legislature, requires fashion retail sellers and manufacturers to disclose their environmental and social due diligence policies and the impacts of their supply chains.

Visibility, transparency, and traceability in supply chains

When the CSDDD enters into law, businesses will need to prove their sustainability credentials. They must have oversight of their entire operations, and those of their supply chain partners, to identify and manage any potential negative impact on the environment or human rights.

Simply put, ignorance is no defence, and verbal assurances won’t achieve compliance.

Traceability programs, like Oritain’s forensic scientific analysis, can audit products at multiple stages of manufacture and sale, to ensure they aren’t associated with practices such as deforestation or forced labour. This testing helps businesses prove the legitimacy of their supply chains and the integrity of their products.

Scientific traceability is a reliable, trusted tool for business leadership to prove compliance with the CSDDD and other such regulations.