CSDDD stands for the Corporate Social and Environmental Due Diligence Directive which will be applicable in the European Union. If implemented, it would mandate companies to identify, prevent, and address the environmental impact and human rights violations caused by their operations. This includes conducting due diligence not only on their own activities but also on their subsidiaries and value chain partners. They must create 'prevention action plans,' secure contractual commitments from partners to follow these plans, and verify compliance accordingly.

In February 2022, the European Commission published the CSDDD proposal, awaiting approval from the European Parliament and Council. This approval process generally takes up to a year, and member states will then have up to two years to implement the directive into national law. The likely mandatory use of CSDDD may be expected before 2024, pending confirmation upon adoption by the European Parliament and Council. (Loyens & Loeff. (2023). Timeline for the Corporate Social Due Diligence Directive (CSDDD)).

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Who does the CSDDD apply to?

Under the proposed EU directive, companies would be categorised into four groups based on their size, turnover, and business activities.

• Group 1 consists of EU companies with over 250 employees and a net worldwide turnover exceeding EUR 40 million, with at least 50% of this turnover generated in high-impact sectors like textiles, agriculture, and mineral extraction.
• Group 2 includes EU companies with more than 500 employees and a net worldwide turnover exceeding EUR 150 million in the last financial year.
• Group 3 comprises non-EU companies generating a net turnover of more than EUR 150 million in the EU during the last financial year.
• Group 4 consists of non-EU companies generating a net turnover of more than EUR 40 million in the EU, with at least 50% of their worldwide turnover coming from high-impact sectors.

The directive aims to regulate due diligence practices and environmental impacts within these groups while exempting micro companies and SMEs. (European Parliament and Council of the European Union. (2022). Directive on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, page 46)

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What about the financial sector?

The contentious issue of whether the financial sector should be significantly excluded from the CSDDD remains unresolved. According to the initial Commission proposal, most financial actors, including banks, insurers, and investment funds, would likely fall under the CSDDD's purview if they meet the discussed threshold criteria. Conversely, the Council Position grants each Member State the discretion to decide whether to bring the financial sector under the CSDDD's scope. If included, the scope would be restricted to services directly linked to capital allocation or insurance and reinsurance coverage. In contrast, the JURI Report takes a contrary stance, explicitly encompassing the financial sector within the CSDDD and labeling the provision of financial services as high-risk. This perspective expands the CSDDD's potential applicability to the financial sector, leading to significant negotiation points concerning the inclusion of large banks, insurers, investment firms, investment funds, and other financial actors.

Under the CSDDD, companies within scope must conduct human rights and environmental due diligence in line with prior OECD Guidance. This entails integrating due diligence into policies, identifying and mitigating adverse impacts, setting up complaint procedures, monitoring effectiveness, and publicly communicating due diligence efforts. Initially, the CSDDD extended due diligence obligations beyond the company itself to subsidiaries and activities throughout the value chain. The Council Position replaces "value chain" with "chain of activities," narrowing the focus to the supply chain and excluding product disposal impacts by consumers. JURI, on the other hand, seems to support the broader scope of the Commission's initial proposal.

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What does the CSDDD require?

The Corporate Sustainability Due Diligence Directive (CSDDD) requires companies to adhere to several key elements to ensure ethical and sustainable business practices:

• Scope: The CSDDD encompasses a wide array of environmental, social, and governance (ESG) risks, such as climate change, deforestation, child labor, and human rights violations. Companies need to conduct thorough due diligence to identify and preempt potential adverse impacts associated with their operations and supply chains.
• Risk Management: Organisations must identify, assess, prevent, and mitigate adverse impacts resulting from their own activities and those within their value chains. Upon identifying risks during the due diligence process, companies should take proactive measures to mitigate them. This could entail developing and implementing targeted policies and procedures to address the identified risks. Additionally, collaborating with suppliers to tackle any arising issues is crucial.
• Reporting Obligations: The CSDDD mandates that companies disclose relevant information concerning their due diligence policies, actions taken, and achieved outcomes. Adopting a transparent approach, organisations must publicly report their due diligence procedures and efforts to tackle environmental and human rights risks. This can be achieved through the publication of comprehensive sustainability reports or by making relevant information readily available on their official website. Transparent reporting enables stakeholders to accurately assess a company's sustainability performance.
• Access to Remedies: The CSDDD aims to enhance access to appropriate remedies for individuals affected by adverse impacts. Companies must establish robust reporting channels, such as hotlines or designated email addresses, to address concerns raised by workers and stakeholders. Subsequently, implementing an efficient investigation and resolution process will be vital in addressing and resolving these concerns, facilitating legal recourse, and ensuring that affected parties have avenues for seeking resolution.

By integrating these fundamental elements into their corporate practices, companies can comply with the CSDDD's comprehensive approach to corporate sustainability due diligence. This emphasizes risk management, transparent reporting, and facilitating access to remedies for affected individuals. (Navex. (2023, March 21). Third-Party Risk ESG: What You Need to Know About the EU Corporate Sustainability Due Diligence Directive (CSDDD)).

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Understanding Third-Party Due Diligence: Identifying Potential Risks

Conducting thorough due diligence on suppliers and third-party partners is crucial, as they can pose significant risks to an organisation both internally and externally. The Comprehensive Supplier Due Diligence Directive (CSDDD) requires organisations to identify and address environmental and human rights risks associated with their suppliers and business partners.

The Council Position underscores a risk-based approach, aligning it closely with effective risk management for companies. By prioritising and addressing severe adverse impacts in the chain of activities, businesses adopt a proactive risk management strategy. When faced with challenges in addressing all impacts simultaneously, the focus on the most critical ones based on severity and likelihood ensure a systematic risk mitigation approach.

Effective due diligence procedures in line with CSDDD guidelines should encompass the following steps:

1. On-Site Assessments: To ensure correct implementation and proper enforcement of the Corporate Sustainability Due Diligence Directive (CSDDD), Member States must designate independent national supervisory authorities. These authorities should be of a public nature, free from conflicts of interest, and independent from the companies covered by the Directive or other market interests. They are entitled to conduct investigations, respond to complaints, and monitor compliance with due diligence obligations. (European Commission. (2022). Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937 (p. 42, para. 53).
2. Policy Review: Examining supplier policies and procedures to ensure that they adequately address environmental and human rights risks. This review should align with information collected during audits.
3. Regulatory Compliance Check: Verifying the supplier's compliance with relevant regulations is critical. Past incidents that could indicate non-compliance with CSDDD requirements should be thoroughly examined, along with the actions taken to rectify any issues.
4. Internal Evaluation: Assessing the supplier's internal management and processes from both regulatory and ethical perspectives. Ensuring that environmental and human rights risks are managed appropriately and that the business has mechanisms to handle reported issues, such as health and safety policies, working condition policies, and internal reporting channels for employees.

By conducting due diligence using these comprehensive measures, organizations can proactively manage risks associated with their suppliers and third-party partners, promoting ethical practices and regulatory compliance within their value chain. (Navex. (2023, March 21). Third-Party Risk ESG: What You Need to Know About the EU Corporate Sustainability Due Diligence Directive (CSDDD)).

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How will the CSDDD rules be enforced?

The CSDDD will be enforced at the Member State level through two mechanisms: administrative supervision and sanctions, civil liability

1. Administrative supervision and sanctions: Each Member State will appoint an authority responsible for overseeing and implementing effective, proportionate, and deterrent sanctions. These sanctions may include fines and compliance orders. At the European level, the Commission will establish a European Network of Supervisory Authorities, ensuring a coordinated approach by involving representatives from national bodies.
2. Civil liability: Member States will ensure victims have access to compensation for damages resulting from companies' non-compliance.

The enforcement of directors' duties will be carried out through the existing laws of each Member State. The directive does not introduce an additional enforcement regime specifically targeting non-compliance by directors with their obligations under this directive.

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Consequences of not complying

The Corporate Sustainability Due Diligence Directive (CSDDD) carries significant consequences for companies found in violation during reporting cycles. Non-compliance may lead to severe penalties, including fines of up to 5% of global turnover (not limited to EU turnover) and exclusion from public tenders. Moreover, directors' variable bonuses may be impacted due to violations.

To avoid these repercussions, companies should prioritise engaging with business relationships in the value chain to effectively prevent and mitigate potential adverse impacts. The Directive emphasises that terminating a business relationship should be a last resort, and efforts to prevent and mitigate adverse impacts should be exhaustively explored first.

If potential adverse impacts cannot be addressed through prevention or mitigation measures, the Directive recommends refraining from entering into new or extending existing relations with the partner. In some cases, if legally permissible, companies may consider either temporarily suspending commercial relationships while pursuing prevention efforts or terminating the business relationship for severe potential impacts. ("Directive of the European Parliament and of the Council," n.d., p. 37, para. 36)

In fulfilling these obligations, Member States should offer the option to terminate business relationships in contracts governed by their laws. Collaboration with other companies, especially those with direct contractual relationships with suppliers, may be necessary to prevent adverse impacts in indirect business relationships. Such collaboration should be done in compliance with competition laws.

The CSDDD also empowers victims to seek compensation through civil liability claims in national courts. These claims can extend beyond the company's operations and apply to its subsidiaries and established business relationships. As a result, supplier engagement and collaboration become essential elements of compliance, enabling companies to proactively address risks and potential adverse impacts throughout their value chains.

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Expected consequences of the CSDDD

The proposed EU directive on due diligence would have significant impacts on large companies:

• Foster enhanced transparency and accountability as they conduct due diligence on their activities and suppliers. By demonstrating a commitment to sustainability and responsible practices, companies can build trust among consumers, investors, and stakeholders, bolstering their reputation.
• Improve risk management by identifying and addressing potential risks, leading to the avoidance of legal issues, supply chain disruptions, and reputation harm.
• Stimulate innovation and adaptability for long-term resilience in a changing global landscape by emphasising sustainability practices also provides a competitive advantage, attracting socially and environmentally conscious customers and improving market positioning, while
• Ensure harmonisation and standardisation across the EU, streamlining compliance efforts, and promoting consistent responsible practices throughout the region.

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Conclusion

The Corporate Sustainability Due Diligence Directive (CSDDD) underscores the EU's commitment to promoting responsible and sustainable business practices. By introducing clear obligations, enhancing supply chain responsibility, emphasising transparency and reporting, and ensuring access to remedies, the EU aims to create a level playing field where companies prioritise sustainability and contribute to a more socially and environmentally conscious future.

Crucially, the CSDDD emphasises the need for businesses to extend their due diligence efforts to encompass suppliers, ensuring responsible practices throughout every level of the supply chain. Engaging, aligning, collaborating, and innovating with supplier stakeholders on their sustainability goals will most effectively position companies to comply with upcoming regulations such as the CSDDD and to deliver a more sustainable vision for our future.

Compliance with the CSDDD brings significant benefits to businesses, including enhanced reputation, effective risk mitigation, competitive advantage, innovation, and legal compliance. Compliance with the CSDDD promotes sustainable practices, builds trust, and positions businesses for long-term success in a changing global landscape. By embracing the obligations and opportunities presented by the CSDDD, companies can contribute to a more sustainable and responsible business ecosystem.

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