The European Parliament voted to endorse a proposed European legislation mandating businesses to address their adverse impacts on human rights and environmental degradation within their global supply networks on April 24th, 2024. The proposed EU Corporate Sustainability Due Diligence Directive (CSDDD) aims to impose legal responsibilities on large corporations to conduct due diligence regarding human rights and environmental issues throughout their global supply chains. Additionally, businesses are required to establish and execute climate objectives and transition strategies to harmonize their business practices with the 1.5C target outlined in the Paris Agreement. With 374 votes in favor, 235 opposed, and 19 abstentions, the European Parliament adopted the "due diligence" directive following prior negotiations with the Council. (The Financial Express, 2024).
This law requires businesses and their affiliates across the entire supply chain, including sourcing, production, and distribution, to implement measures to prevent, cease, or alleviate any adverse effects on human rights and the environment. These effects may involve various issues, such as slavery, child labor, labor exploitation, biodiversity loss, pollution, or depletion of natural resources.
According to Sustainability Magazine, the European Union (EU) anticipates that the CSDDD will affect approximately 13,000 EU businesses and around 4,000 businesses beyond the EU. The forthcoming regulations will have repercussions for three primary categories: large enterprises, non-EU businesses, and micro-companies. Non-EU businesses, for instance, will need to comply with the CSDDD if they operate within the EU or if their products are sold in the EU market. Large corporations with more than 1,000 employees and a turnover exceeding 450 million euros will be required to adhere to the compliance standards outlined in the directive. (Sustainability Magazine, 2023).
What is the Corporate Sustainability Due Diligence (CSDDD)?
The CSDDD stands as a directive within the European Union, with the primary aim of fortifying environmental protection and upholding human rights, both within the EU borders and on a global scale. It imposes obligations on businesses to tackle actual and potential negative impacts on human rights and the environment, encompassing not only their own operations but also those of their subsidiaries and, significantly, their suppliers.
Initially adopted by the European Commission on February 2022, the CSDDD aim to foster sustainable and responsible corporate behavior and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules will ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe. (European Commission, 2024).
By the year 2027, companies should have made the necessary preparations to adhere to the directive, with larger corporations likely among the first to comply.
What Does the CSDDD Mean for Businesses?
In an era where global accountability is increasingly demanded, the era of disregarding supply chain impacts is drawing to a close. The Corporate Sustainability and Due Diligence Directive (CSDDD) is positioned to overhaul the landscape of corporate governance, compelling businesses to take proactive steps in addressing negative human rights and environmental effects across their operations and supply chains.
Under the CSDDD, businesses face rigorous responsibilities to identify, prevent, and mitigate adverse impacts, with accountability for their actions. This directive applies to their immediate operations, subsidiaries, and the broader supply chain. Businesses must consider the human rights, climate change, and environmental ramifications of their decisions, ensuring a comprehensive approach to sustainability.
Moreover, large corporations are tasked with aligning their strategies with the goals of the Paris Agreement, with a clear objective to limit global warming to 1.5°C. This necessitates formulating comprehensive plans to achieve net-zero emissions, marking a significant step towards a sustainable future.
How Do We See this as an Opportunity?
It is imperative not to perceive the CSDDD solely through the lens of regulatory obligation. Instead, it should be viewed as a gateway to numerous company advantages. Compliance with the directive offers a spectrum of opportunities, including:
Strengthened customer trust and heightened employee dedication.
Enhanced risk management capabilities, fortifying resilience against potential challenges.
Facilitated access to financial resources, fostering avenues for sustainable growth.
Better awareness of companies’ negative environmental and human rights impacts.
Harmonized legal framework in the EU, creating legal certainty and a level playing field.
Increased attractiveness for talent, sustainability-oriented investors, and public procurers.
On the other side, it also generates more benefits for citizens, such as better protection of human rights including labour rights, healthier environment for present and future generations, increased trust in businesses, more transparency enabling informed choices, to the better access for justice for victims.
Who is Subject to CSDDD?
The revised CSDDD has significantly reduced the number of businesses covered by the new legislation by elevating the thresholds for inclusion. Specifically, EU-based businesses with a workforce of 1,000 employees or more and a net global turnover exceeding 450 million EUR are now subject to the directive. (ESGToday, 2024). These adjusted thresholds are expected to decrease the number of companies falling within the scope of the CSDDD by approximately two-thirds. Additionally, lower thresholds previously applied to high-risk sectors have been eliminated, although they may be reconsidered at a later time.
However, even entities not directly within the scope of the CSDDD should anticipate some level of impact and prepare accordingly. This anticipation arises from the likelihood that companies subject to the directive will involve their smaller business partners in their due diligence processes.
Companies that the CSDDD targets will be required to execute the following steps:
Integrate human rights and environmental due diligence into policies.
Develop a process to identify and assess actual or potential adverse human rights and environmental impacts – both in own operations and in the supply chain.
Prevent or mitigate potential impacts.
Track the implementation and results to evaluate the effectiveness of due diligence procedures (at least once every 12 months).
Publish an annual statement on your website to communicate the relevant due diligence measures taken during the previous calendar year.
Establish and maintain a complaints procedure.
What Happens if Businesses Don't Comply?
Companies that fall short of the EU's Corporate Sustainability Due Diligence standards face the prospect of receiving a compliance order or encountering significant financial penalties, the extent of which is contingent upon the company's turnover. These penalties may reach fines of up to 5% of the company's net global turnover. Furthermore, national authorities may potentially incorporate compliance with the CSDDD as a criterion for the allocation of public contracts and concessions, leading to exclusion from tender processes. (Lexology Data Hub: 2024).
Furthermore, businesses not directly targeted by CSDDD may still feel its impact if they engage with partners bound by the directive. Such businesses might be compelled to sever ties with partners found to have unmitigated adverse environmental or human rights impacts.
Let’s Talk to Our Expert: Contact Us!
Fortunately, assistance is readily available! Our experts are here to help! KOLTIVA solutions supports global supply chains in complying with voluntary and regulatory requirements across commodities and borders. After releasing our State-of-the-art EUDR Solutions that help businesses comply with this regulations, we are ready to be the foremost global platform enabling businesses to engage with their suppliers, facilitating access to essential supply chain data required for compliance with present and forthcoming regulations. Intrigued? Connect with one of our experts today!
Resources:
The Financial Express, 2024: EU parliament passes landmark law on corporate accountability.
Commission.Europa.EU, 2024: Corporate sustainability due diligence - Fostering sustainability in corporate governance and management systems.
ESG Today, 2024: EU Parliament Adopts Environmental, Human Rights Sustainability Due Diligence Law.
Sustainability Magazine, 2023: What is CSDDD and which European businesses will it impact?
Lexology Data Hub, 2024: EU Adopts Mandatory Rules on Corporate Sustainability Due Diligence That Will Apply to Many US Companies.
About Writer:
Writer: Gusi Ayu Putri Chandrika Sari, Social Media Officer at Koltiva
Editor: Boby Hermawan, Head of Digital Marketing at Koltiva
Gusi Ayu Putri Chandrika Sari, serving as Koltiva's dedicated Social Media Officer, brings an impressive six-year track record in communications, bolstered by a profound enthusiasm for sustainability, technology, and agriculture. Her extensive experience in communications has honed her skills in crafting compelling narratives and engaging content across various digital platforms.
