On April 24, 2024, the European Parliament approved the Corporate Sustainability Due Diligence Directive (CSDDD). This new law requires big companies, both within and outside the EU, to ensure they’re not causing harm to people or the environment through their business practices. Essentially, it means these companies have to thoroughly check and address any potential human rights violations or environmental damage in their supply chains and operations.
What is CSDDD, and why is it important?
CSDDD holds large businesses accountable for their actions and their effects on society and the environment. CSDDD garnered substantial backing from academics, businesses, networks, and the United Nations, which urged EU leaders to approve it. This directive is crucial because it mandates several key actions for large corporations operating in the EU including:
- Thoroughly evaluate and address any harm caused along their global supply chains.
- Adopt a risk-based approach, focusing on addressing the most severe harms.
- Align their climate transition plans with the goals of the Paris Agreement.
To ensure compliance, national supervisory authorities will be established to oversee and enforce the directive, with the power to impose sanctions if necessary. This law also introduces civil liability, meaning companies can be held financially accountable for human rights or environmental damages resulting from their failure to comply with the directive.
In addition to its broader implications for corporate accountability, CSDDD also holds particular significance within the context of Environmental, Social, and Governance (ESG) considerations. With its emphasis on thorough evaluation and mitigation of environmental and supply chain human rights risks globally, this directive aligns closely with ESG principles by mandating companies to adopt a risk-based approach and align their climate transition plans with the goals of the Paris Agreement. This convergence between regulatory requirements and ESG imperatives underscores the CSDDD’s role in shaping a corporate landscape that prioritizes long-term sustainability and responsible governance.
By addressing environmental and social risks, companies subject to CSDDD will strengthen their ESG credentials, positioning themselves favourably in the eyes of investors seeking sustainable investment opportunities. Consequently, this law also catalyses advancing ESG integration in corporate governance and investment practices, ultimately contributing to a more sustainable and resilient global economy.
First proposed in February 2022, this current iteration of this directive has weathered numerous political obstacles before reaching its present form. On December 14, 2023 negotiators finalized a political agreement on the CSDDD. However, the German government’s junior coalition partner FDP rejected the compromise, causing Germany to withhold its support.
This led to a setback when member states couldn’t agree on the CSDDD during a meeting on February 28, 2024, especially due to uncertain positions from Italy and France following Germany’s rejection. Nevertheless, on March 15, 2024, EU member states rallied behind the political agreement proposed by the Belgian Presidency.
Recent changes to the directive have led to its weakening due to uncertainties stemming from Germany, France, and Italy. These changes have resulted in reduced coverage and sector inclusion.
Others have criticized the exclusion of the financial sector from due diligence obligations, especially since this sector is involved in potentially harmful projects. Another criticism is the absence of legal mechanisms to enforce climate action by companies under the directive.
Regardless of these critiques, CSDDD will still have far-reaching effects beyond the borders of the EU. It’s designed to tackle the power disparity between companies focused solely on profit and the communities they affect. Under the CSDDD, communities worldwide have the right to take legal action against companies that don’t comply with the standards to the EU courts. This means they can pursue justice or compensation directly from the company for any harm caused.
Who will CSDDD effect?
CSDDD will impact several groups. It applies to EU-based companies with more than 1000 employees and a turnover (revenue) of at least €450 million globally. According to calculations by SOMO, approximately 5,400 EU companies fall under this category. Additionally, non-EU companies with a turnover of €450 million in the EU will also be subject to the CSDDD.
The implementation will be phased, with larger companies needing to comply first:
- Companies with over 5,000 employees and a turnover of €1.5 billion must comply by 2027.
- Companies with 3,000 employees and €900 million turnover by 2028.
- Companies with 1,000 employees and €450 million turnover by 2029.
Companies falling under these criteria should assess their current approaches to sustainability and human rights due diligence to prepare to meet the CSDDD compliance requirements.
What’s next?
The law is currently awaiting the final approval of ministers from EU member states, which is anticipated to occur in late May. Once this approval is secured, EU member states will have two years to incorporate the CSDDD into their national legislation. These national laws will then become applicable to companies, starting from the year 2027.
While the CSDDD represents a notable achievement in terms of holding corporations accountable, it may not fully meet all expectations. Nevertheless, it marks a significant step forward in holding large companies accountable for their social and environmental impacts and facilitates ESG integration in corporate governance.