Corporate sustainability due diligence directive (CSDDD)

What is the CSDDD?

If adopted, the European Commission’s proposal for a Corporate Sustainability Due

Diligence Directive (CSDDD) would require companies to establish due diligence
procedures to address adverse impacts of their actions on human rights and the
environment, including along their value chains worldwide. The aim is to foster sustainable
and responsible corporate behaviour and to introduce sustainability considerations in
companies’ operations and corporate governance.

How will this affect us?

The CSDDD imposes different obligations on different types of companies (see overview
table above). All companies within its scope will have to implement due diligence
measures to identify, end, prevent, mitigate, and account for negative human rights and
environmental impacts of their actions. For instance, due diligence would imply
developing and implementing “prevention action plans”, obtaining contractual
assurances from direct business partners, and subsequently verifying compliance.
Companies covered by the directive would need to ensure due diligence not just
regarding their own operations, but also regarding the activities of all entities in
their value chains with which they have direct and indirect business relationships.

Companies with a turnover of more than 150 million Euro (group 1 & 3 above) will also
have to develop a plan to ensure that their business strategy is compatible with limiting
global warming to 1.5 °C in line with the Paris Agreement. Companies that identify climate
change as “a principal risk for, or a principal impact of,” their operations would have to
include emissions reduction objectives in their business plans.

Costs?

To comply with the new rules, companies may incur costs related to establishing and
operating due diligence processes and procedures. In addition, companies may also incur
additional transition costs from investments needed to change their own operations and
value chains to address adverse impacts.

Latest update

The CSDDD was proposed by the Commission in February 2022. In December 2022, the
European Council finalised its general approach. It proposes to narrow the scope to cover
only EU companies with more than 1,000 employees and EUR 300m net worldwide
turnover, and non-EU companies with EUR 300m net turnover generated in the EU. By
contrast, members of the European Parliament (MEPs), where the proposal is still awaiting
Parliament’s position, seem inclined to expand, rather than narrow, the scope of the
CSDDD to a wider range of companies.

The Council also rejected the Commission's proposal that due diligence should fall
under the directors' fiduciary duty of care. Instead, due diligence processes should be
incorporated into risk management systems and company policies. It also deleted the
original proposal to base variable remuneration on directors' contributions to
sustainability. By contrast, MEPs might be inclined to broaden the scope of
environmental issues to include more obligations related to nature and biodiversity as well
as climate-related objectives.

The CSDDD is expected to enter trilogue negotiations later in 2023 with the aim of
adopting the directive by 2024. Its rules will not become applicable before 2025 at the
earliest.