The Corporate Sustainability Due Diligence Directive (CSDD) will establish mandatory human rights and environmental due diligence obligations (duty of care) for companies operating across the EU.
The legislation is in the final negotiation process and key elements are still on the table, including directors’ duties, the scope of business relationships covered, and the inclusion of financial institutions. Companies can expect civil liability for harm, full value chain due diligence requirements across human rights and environmental risks, and stakeholder engagement obligations.
About the CSDD
- The EU Corporate Sustainability Due Diligence Directive (CSDD) will establish mandatory due diligence on human rights and environmental risks for large and some mid-sized companies operating within the European Union (EU).
- The requirements are based on the OECD Guidelines for Multinational Enterprises (OECD Guidelines) which set out a company’s responsibilities on due diligence on human rights and environmental impacts. The CSDD will regulate what has been to date voluntary guidance from the OECD.
- The CSDD is designed to lock in with other legislation being developed by the EU, including the disclosure requirements set out in the EU Corporate Sustainability Reporting Directive (CSRD), which will apply from 2024.
- The CSDD will likely apply to large EU-based and foreign companies and mid-sized companies in high-impact sectors. This includes:
- EU companies with over 500 employees and a worldwide net turnover of more than €150 million.
- EU companies with over 250 employees and a worldwide net turnover of more than €40 million if 50% of the company’s turnover is in a high-impact sector. High impact sectors will likely include garment and footwear, agriculture, forestry, fisheries, food products, the wholesale trade of agricultural raw materials, live animals and wood, and minerals.
- Foreign owned companies which have generated the aforementioned turnovers within the EU. No reference is made to numbers of employees.
- SMEs are excluded.
- The EU CSDD is moving through the legislative process. Together, the position of the EU Council and the EU Commission’s draft legislative proposal point to issues that are still on the table, versus those that have alignment and companies can expect to stay in the CSDD. The EU Parliament’s position is expected to be agreed in May 2023.
Issues still on the table
The EU Council and the EU Commission do not agree on three key points.
- The responsibility of directors for human rights and environmental due diligence. The EU Commission wants directors to hold responsibility for the company’s human rights and environmental due diligence and link sustainability and climate change strategies to a director’s variable remuneration. This would put human rights and environmental risks on a more equal footing with other business risks. The EU Council is not in favour of extending directors’ duties or linking remuneration to sustainability.
- The scope of business relationships covered by the CSDD. The EU Commission proposed that companies are required to conduct due diligence on companies in the value chain that are linked to an “established business relationship”, meaning longer-term and higher volume suppliers and business partners. The EU Council is against the concept of “established business relationship”. It proposes that all business relationships are in scope for a company, regardless of their duration or significance, and that companies prioritise suppliers and business relationships in their due diligence process based on where the impacts and risks to people and the environment are more severe. This position is more in line with the OECD Guidelines and the UN Guiding Principles on Business and Human Rights and requires more subjective judgement in relation to which risks are prioritised.
- Whether financial institutions are captured under the CSDD. There is disagreement over whether financial institutions should be covered by the CSDD. The EU Commission proposed limited due diligence obligations for financial institutions providing loan, credit, or other financial services. The EU Council proposed that the decision on whether to include due diligence obligations for financial institutions is left up to each EU Member State when transposing the CSDD.
What companies can expect will stay in the CSDD
The EU Commission and EU Council agree on the majority of aspects, and it’s likely these will remain in the final draft. As a result, companies can expect:
- To face civil liability for human rights and environmental damages and sanctions for non-compliance. Under the draft CSDD, a company can be held liable if it has not implemented due diligence as required, and as a result an impact has occurred. Companies are exposed where there are foreseeable and severe human rights and environmental risks and where there is not a strong and systematic approach in place to address them. EU Member States will be required to make it possible for civil cases to be brought against companies under national law and to provide dissuasive, proportionate, and effective sanctions for non-compliance.
- To carry out due diligence on their full value chain, from raw material to recycling and landfill. The CSDD will apply to upstream production and downstream activities. This means that impacts at a company’s raw material producers are in-scope, as are a company’s circular economy programmes.
- To carry out due diligence on their owned and controlled activities. The CSDD applies to the full scope of own operations and companies should expect this to cover both those within the EU and overseas, and all employees, both directly employed and those provided through contractors or agencies for example. The use phase of a product may not remain in scope.
- To have a human rights and environmental due diligence policy. Under OECD due diligence guidance, a due diligence policy commits the company to carrying out due diligence in-line with the OECD Guidelines, including specific due diligence steps such as a risk assessment, supplier assessments/ auditing, addressing risk and impacts, and meaningful stakeholder engagement in that process. The policy is approved at a board level and designates accountability for the company’s human rights and environmental due diligence.
- To conduct robust risk assessments to identify negative human rights and environmental risks and impacts in their operations and value chains.
- To develop strategies to address complex human rights or environmental issues.
- To terminate or suspend a business relationship if a negative impact cannot be ceased or minimised.
- To have a complaints procedure and ensure damages are paid if there is a negative impact. Companies will be required to provide a complaints procedure for stakeholders to submit complaints and legitimate concerns related to their operations, subsidiaries, and value chain. If a negative impact has occurred, remedy must be provided to affected persons or communities, which is proportionate to the significance and scale of the negative impact.
- To be required to engage stakeholders in the due diligence process. The extent of stakeholder engagement is still up for discussion, but some level of engagement is expected throughout a company’s due diligence.
Next steps
- The European Parliament is expected to agree on their negotiating mandate by May 2023. The EU Commission, EU Parliament and EU Council will then enter Trilogue negotiations to reach a provisional agreement on a text. The Trilogue negotiations are closed-door.
This is not legal advice. This Insight is based on the EU Commission’s proposal of February 2022 and the EU Council’s negotiating mandate of December 2022. As such, it is subject to change as the CSDD progresses through the legislative process.