By George Porter
On June 1st the European Parliament agreed on their negotiating position for the proposed European Corporate Sustainability Due Diligence Directive (CSDDD). This directive aims to enhance corporate sustainability by expanding on previous laws and introducing new responsibilities for businesses. The CSDDD goes beyond simply identifying or classifying risks. Affected companies are required to not only identify but also take steps to prevent, end or at least mitigate activities that can harm human rights or the environment.
The directive is expansive, requiring firms to identify and monitor human rights and environmental issues throughout the life-cycle of production, sale and waste management of product or provision of services, at the level of their own operations, subsidiaries as well as in the value chain. Failing to comply with the due diligence requirements of the directive could result in significant penalties, including bans on participating in public procurement, goods being taken off the market or severe financial penalties.
Evolution of ESG and Supply Chain Laws in the EU
The CSDDD represents a significant step towards fostering sustainable and responsible corporate behaviour. It builds upon previous voluntary and mandatory reporting regulations and introduces compelling stricter due diligence measures. This is the latest evolution of ESG and supply chain focused laws that have come into place over the last few years in Europe. This evolution reflects a shift from self reporting to a detailed evaluation of a company's entire value chain.
A significant step on this evolutionary path was the German Supply Chain Due Diligence Act (SCDDA) which came into effect on January 1, 2023. This act requires businesses based in Germany with more than 3,000 employees (or German-registered branches of foreign companies with over 3,000 employees) to establish risk management systems and preventive measures in their supply chains. It focuses on issues such as child labour, forced labour, and soil pollution. While the SCDDA has a wide-ranging impact, it is limited to companies operating within Germany.
Previous ESG initiatives in the EU have been either sectoral or focused on risk classification and reporting. For example, the Conflict Minerals Regulation and Deforestation Regulation mandates supply chain due diligence for specific imports. The Sustainable Finance Disclosure Regulation and Taxonomy Regulation primarily classifies and reports risks. In contrast, the CSDDD goes beyond identification and classification, requiring companies to actively prevent or mitigate activities harmful to human rights and the environment throughout their entire value chain.
The CSDDD addresses both human rights and environmental concerns. While human rights issues covered by the directive align with existing national laws, such as modern slavery and child labour regulations, the environmental requirements are groundbreaking. Companies must implement plans to limit global warming to 1.5 degrees, with director bonuses tied directly to achieving this target for large companies with over 100 employees.
Potential Consequences for Non-Compliance
The CSDDD not only sets comprehensive requirements but also outlines significant punishments for non-compliance. The current wording of the directive outlines”consequences including civil liability for those companies that cause or contribute to harm by failing to carry out due diligence”. Those consequences include bans on participating in public procurement, goods being taken off the market or fines of at least 5% of net worldwide turnover. Given that the directive also states a commitment to ”ensuring that those affected by a failure to respect this duty have access to justice and legal remedies”, the potential for civil liability penalties being leveraged against companies is a real scenario.
The European Corporate Sustainability Due Diligence Directive represents a significant milestone in promoting sustainable and responsible corporate behaviour within the EU. By going beyond reporting, the directive requires companies to actively prevent or mitigate activities that harm human rights and the environment. Compliance is crucial, as non-compliance may result in severe consequences. As the directive moves forward for discussion and potential implementation in 2025, businesses must be prepared to adapt and align their due diligence practices with the evolving ESG landscape.
What will an effective due diligence programme entail under the CSDDD? We examine the role of DD in mitigating negative impacts in the supply chain in the second blog of this series.
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