CSDDD: The EU's Due Diligence Law for Cooperations
Read our analysis on how the EU is ensuring corporate sustainability by making due diligence on environment and human rights mandatory through the Corporate Sustainability Due Diligence Directive (CSDDD).
The EU has corporate sustainability policies for businesses to enhance protection of the environment and human rights in the EU and beyond.
Background
The Commission proposed a corporate sustainability due diligence regulation to the Council and the European Parliament on February 23, 2022. On December 1, 2022, the Council approved its basic strategy. In December 2023, the Council and the European Parliament reached a provisional deal on the corporate sustainability due diligence directive.
About The Law
In July 2024, the EU published their CSDDD law:
Introduction to CSDDD
It is required for karge companies within and outside the EU to take action to avoid and reduce negative effects on human rights and the environment resulting from their activities, subsidiaries, and associates (corporate sustainability due diligence). They should guarantee that their business practices are in accordance with the objective of the Paris Agreement to restrict global warming to 1.5°C. Sanctions and legal responsibility will be imposed for any breaches of these responsibilities. These fresh regulations will encourage sustainable manufacturing, improved labor conditions, responsible investments, and enhanced transparency in the production of goods.
CSDDD Reporting
The EU has introduced new rules for corporate sustainability reporting, requiring large companies and listed SMEs to report on environmental, human rights, anti-corruption measures, and diversity issues. These rules aim to empower investors to make decisions that benefit both people and the environment, increase company accountability, and facilitate the transition to a sustainable economy.
You can read about it more here.
European Parliament demands more
Parliament has consistently called for more corporate accountability and mandatory due diligence legislation. It complements other existing and upcoming legislative acts, such as the deforestation regulation, conflict minerals regulation and draft regulation prohibiting products made with forced labour.
EU Council and EU Parliament agree (December 2023)
A preliminary agreement was achieved between the European Parliament and the Council on the corporate sustainability due diligence directive (CSDDD). The regulation seeks to improve environmental and human rights protection both inside the EU and internationally. Large corporations will be subject to requirements under the due diligence directive about actual and prospective negative effects on human rights and the environment, of their activities, those of their subsidiaries, and those of their business partners.
The new EU CSDDD will obligations for companies to mitigate their negative impact on human rights and the environment such as child labour, slavery, labour exploitation, pollution, deforestation, excessive water consumption or damage to ecosystems .
Businesses will have to integrate “due diligence” into their policies and risk-management systems, including descriptions of their approach, processes, and code of conduct. Firms, including financial sector, will also have to adopt a plan ensuring their business model complies with limiting global warming to 1.5°C. MEPs ensured that the management of companies with over 1000 employees will receive financial benefits for implementing the plan.
CSDDD Obligations for companies
The due diligence directive establishes guidelines for large corporations' responsibilities about actual and potential negative effects on human rights and the environment for their supply chain, which includes some downstream activities like recycling and distribution as well as upstream business partners.
The directive mandates that businesses produce a plan guaranteeing that their business model and strategy are consistent with the Paris Agreement on climate change.
It also establishes guidelines for fines and civil responsibility for violating such duties.
Main elements of the agreement
The two co-legislators came to a temporary agreement that outlines the directive's parameters, makes clear the consequences for non-compliance, and rounds out the list of rights and restrictions that businesses must abide by.
CSDDD Rules applicable to big companies and those in high-risk sectors
The legislation will apply to EU companies and parent companies with over 500 employees and a turnover of over 150 million euros worldwide.
It will also apply to companies with over 250 employees and a turnover of over 40 million euros if at least 20 million are generated in sectors such as textiles, clothing, agriculture, food, raw agricultural materials, mineral resources, and construction.
Non-EU companies and parent companies with equivalent turnover in the EU will also be affected:
Companies must
identify,
assess,
prevent,
mitigate, and
remedy
their negative impact on people and the planet, including
production,
supply,
transport,
storage,
design, and
distribution.
This includes investments, contractual assurances, business plan improvements, and support for small and medium-sized enterprises.
Three years after the directive's enactment, it will become applicable to non-EU businesses if they have a net turnover of more than €150 million inside the EU.
A list of non-EU businesses covered by the regulation must be made public by the Commission.
CSDDD Information portal for companies
MEPs have required companies to explain their due diligence rules, interact with impacted parties, provide a complaints system, and periodically assess their efficacy.
The need for EU governments to provide useful websites with information on content, criteria, Commission guidelines, and stakeholder data in relation to corporations' due diligence duties was also underlined.
CSDDD and the Banking Industry
The agreement struck today states that financial services would be temporarily removed from the directive's purview, but that a review provision will allow for the potential future inclusion of the financial downstream sector, provided that a proper impact assessment is conducted.
CSDDD, Climate change and legal responsibility
The agreement reached today reinforces the clauses pertaining to big businesses' need to develop and implement a transition plan for mitigating climate change using their best efforts.
Regarding civil responsibility, the agreement strengthens impacted parties' access to justice. It sets a five-year statute of limitations during which parties affected by negative effects (such as trade unions or civil society groups) may file claims. Injunctive orders, evidence disclosure, and claimant costs are all restricted by it as well.
In the worst-case scenario, businesses that discover negative effects on the environment or human rights due to certain business partners may have to sever ties with them if preventive or remedial measures are not possible.
CSDDD Sanctions and supervision
Supervisory bodies will be designated by EU countries to monitor companies' compliance with their due diligence obligations. These entities will work together through the European Network of Supervisory Authorities to exchange expertise.
They are empowered to carry out inspections, investigate non-compliant enterprises, and impose fines of up to 5% of their worldwide revenue, as well as employ "naming and shaming" strategies. Companies that fail to fulfil their due diligence responsibilities will be held responsible, and restitution will be provided to those affected.
CSDDD Penalties
The provisional agreement includes various injunction measures and considers the turnover of the company to impose financial penalties (i.e., a minimum maximum of 5% of the company's net turnover) for companies that fail to pay fines imposed on them in the event of a violation of the directive. As part of the due diligence process, the agreement requires corporations to engage meaningfully with impacted stakeholders, including via communication and consultation.
CSDDD and Public acquisition
The agreement stipulates that governmental contracts and concessions may be awarded based on adherence to the CSDDD.
CSDDD Definitions
The law makes clear what businesses must do by Annex I, a list of certain rights and restrictions that, when misused or infringed, hurt human rights. The list includes references to international agreements that all member nations have signed and that provide sufficiently precise guidelines that businesses may adhere to.
The compromise adds additional human rights-related requirements and mechanisms, especially for vulnerable populations, to the list in the Annex. After being accepted by every member state, core conventions of the International Labour Organisation (ILO) may also be added to the list by delegated actions.
References to additional UN treaties, including the Convention on the Rights of the Child and the International Covenants on Civil and Political and Economic, Social, and Cultural Rights, are also included in the annexe of the provisional agreement. The agreement also makes clear that any quantifiable deterioration of the environment, including adverse soil changes, air or water pollution, harmful emissions, excessive water use, or other effects on natural resources, is included in the scope of environmental consequences covered by this directive.
More information and links
EU Commission Website
Guidelines for Multinational Enterprises (MNE Guidelines) of the Organisation for Economic Cooperation and Development (OECD)
EU: New Study with tips on how SME's can meet due diligence laws
A new study provides top tips on how SME's can manage due diligence legal requirements after studying the German (Lieferkettengesetz). Summary and download here
Corporate sustainability (background information)
EU: Companies trading globally must respect human rights & environment (Due Dilligence). Link to details
Press Releases
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