CSDDD: Impact on Corporate Responsibility and Compliance

The European Council recently endorsed the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D), marking a pivotal moment in corporate responsibility and compliance regulations. With significant alterations from its initial proposal, this directive carries profound implications for businesses across the European Union. Our team of ESG and Sustainability experts offers key information into understanding the directive and seamlessly integrating it into your organizational practices. 

CSDDD Aims to Enhance Corporate Responsibility on Human Rights and Environmental Compliance 

Initially proposed in February 2022, the original text underwent several adjustments before its final version. After weeks of negotiations, the member states of the European Council reached a compromise on March 15, 2024, regarding a proposed directive on European due diligence. 

This directive, also known as the Corporate Sustainability Due Diligence Directive (CSDDD), aims to enhance corporate responsibility within the European Union in two critical areas: human rights and environmental compliance. Several European countries already had laws that cover supply chain accountability, such as France with the “Devoir de vigilance”. The implementation of the CSDDD reflects the ongoing efforts of the European Union to: 

• promote responsible corporate conduct by making companies accountable for their supply chain  
• and ensure respect of minimal safeguard for social rights and the environment, by also aligning with the OECD “Guidelines for Multinational Enterprises” and the International Labor Organization’s “Tripartite declaration of principles concerning multinational enterprises and social policy”. 

The Final Directive Covers Larger Companies: Above 1000 Employees and With a Turnover Higher than €450 million  

The final version of the directive, approved on March 15, 2024, applies to fewer companies and activities and allows for a more gradual implementation than initially planned. The thresholds were adjusted to target companies most likely to impact human rights and the environment while reducing the administrative burden for smaller businesses. These thresholds were calibrated to balance the directive’s scope and ensure its feasibility for various business sizes. Approximately 5,500 European companies will be subject to this directive, a significant reduction from the original 16,000.

Companies Have 3 To 5 Years to Comply with the Directive 

The directive’s application timeline has been defined based on company size, providing EU and non-EU companies with 3 to 5 years to comply, starting the entry into force of the directive (likely in 2024). This progressive approach aims to allow companies to gradually adapt to the new requirements and implement the necessary systems to comply with the directive.  

Enhanced Requirements for ESG Due Diligence and Carbon Reduction 

Companies subject to the directive must implement ESG due diligence in their supply chain. This includes identifying adverse impacts on human rights and the environment, taking remedial actions, and preventing future impacts. These obligations cover the company’s operations and its value chains. Furthermore, companies must develop a plan to align their carbon trajectory to the Paris Agreement, aiming to limit global warming to +1.5°C. 

The original proposal by the Commission required companies to conduct due diligence not only in their own operations but also throughout their supply chains, both upstream (suppliers) and downstream (customers). However, the provisional agreement has narrowed this scope to focus specifically on certain parts of the value chain, referred to as the “chain of activities.” This definition has been further refined by excluding: 

• Downstream activities carried out by indirect business partners, so only activities directly performed “for the company or on behalf of the company” are included. 
• Downstream activities related to product disposal, such as dismantling, recycling, composting, and landfilling, are also excluded from the scope of the directive. 

Companies that remain non-compliant risk a compliance order and financial penalties proportionate to the company’s turnover (up to 5% of the net worldwide turnover). 

How To Integrate CSDDD into Your Sustainability Reporting and Strategy 

Concretely, companies will need to collect ESG data from their operations and suppliers regarding human rights and environmental actions. They must identify and assess potential and actual adverse impacts. Once identified, companies will implement actions to mitigate these risks. They will publish an annual statement on their website detailing their due diligence actions for the year. The directive also requires companies to formalize a Code of Conduct, outlining procedures to ensure supplier alignment, and establish an external whistleblowing procedure.

More generally, companies should use the OECD guidelines for Responsible Business Conduct to comply with the regulation. 

It will be key for Sustainability, ESG, and EHS professionals to: 

• Update their due-diligences process to integrate more qualitative information based on market information, stakeholder consultations, and on-site supplier audits, and dedicate a part of reports to climate and supply chain analyses; 
• Systematically consider climate and supply chain as key stakes in the definition of a company’s sustainability strategy. 

In conclusion, the European directive on Due Diligence represents a significant advancement towards a more responsible economy. Despite compromises, the CSDDD remains an important instrument for enhancing corporate responsibility in human rights and environmental protection. Its adoption marks an important step in promoting responsible corporate conduct within the EU and signals Europe’s commitment to these values.