In the Spring of 2022, in the shadows of ongoing discussions about the new Corporate Sustainability Reporting Directive (CSRD), the European Commission developed and published a proposal for a Corporate Sustainability Due Diligence Directive (short: CSDDD). With the attempt to ensure both human rights and the environment are protected and placed at the forefront in global value chains.
In this article, we’ll look at this new European directive and put it into the context of regulatory initiatives and explore the following:
- Key objectives of the CSDDD
- How the CSDDD is connected to the CSRD and the EU Taxonomy
- Requirements of the CSDDD
- The future of sustainability in supply chains
The CSDDD: The European Due Diligence Initiative and its Key Objectives
With the Green Deal, the European Union has set the course for reinforcing sustainable and digital transformation as a level-plane field in Europe and placing it in the spotlight with precise requirements. The draft for a Corporate Sustainability Due Diligence Directive (CSDDD), published in Spring 2022, furthers the ideals that the European Commission is taking a step towards placing sustainability in global value chains under standardized European conditions.
But what is the purpose of the CSDDD draft? The directive stipulates that companies in its scope must:
- Identify risks regarding environmental and human rights impacts along the entire value chain
- Take preventive and mitigating measures
- Report on them
In doing so, companies must monitor the upstream chain (e.g., raw material extraction) and the downstream chain (use, recovery, disposal).
Consequently, due diligence processes paired with related corporate policies and a specific code of conduct are to be established to meet the requirements formulated in the directive and fulfill the responsibility in a globalized world for one’s supply chain. The EU is thus following the example set by Germany, where the German Supply Chain Law entered into force on January 1, 2023, for companies with more than 3,000 employees and will come into force next year for companies with more than 1,000 employees.
However, the EU proposal goes even further in its requirements and, above all, takes in its scope far more companies than the German law:
- Group 1: Large companies (approx. 12,000 companies), 500 employees or more, and a minimum turnover of 150 million EUR
- Group 2: Companies from high-risk industries (approx. 4,800 companies), 250 employees or more, minimum turnover of EUR 40 million (industries with high-risk potential such as textiles, agriculture, raw materials extraction, chemicals, food, fisheries, etc.)
- Small and medium-sized enterprises: (SMEs) are not directly affected, most indirectly through their position in the value chain.
- In addition, a particular scope element is that the CSDDD also applies to companies from any third country if they have the following:
- More than €150 million in net annual turnover in the EU or
- €40-150 million in net annual turnover in the EU and at least €20 million of their worldwide turnover in a risk sector.
However, the Legal Affairs Committee of the EU Parliament has submitted a significantly stricter version to Parliament in an amendment proposal adopted on November 7, 2022:
- Group 1: Large companies with 250 employees or more and a minimum turnover of 40 million EUR.
- Group 2: Companies from high-risk industries, 50 employees or more, minimum turnover of 8 million EUR, and 50% from high-risk industries (industries with high-risk potential such as textiles, agriculture, raw materials extraction, chemicals, food, fisheries, etc.).
How the CSDDD is Connected with the CSRD and the EU Taxonomy
The CSDDD is intended to complement the more advanced sustainability reporting according to the CSRD, in which human rights and environmental impacts shall also be reported. The CSDDD is designed to ensure that appropriate performance and due diligence are implemented, which will then be made transparent in accordance with the CSRD. The two initiatives are, therefore, closely interrelated and will lead to synergies.
In addition, the CSDDD shall also be understood in the context of the Sustainable Finance Disclosure Regulation (SFDR), which has also come into force. Here, financial market participants are required to make statements on due diligence policies that guide their investment decisions on sustainability factors. Thus, the CSDDD is also intended to complement the EU Taxonomy, which categorizes business activities to define when a business activity can be considered sustainable.
The extent to which business activities, for example, comply with the Declaration of the International Labor Organization on Fundamental Principles and Rights at Work and the International Bill of Human Rights, for example, also plays a role. These two instruments are meant to bring together the capital market and the real economy in sustainable transformation and channel money into sustainable business activities.
Now Let’s Talk Straight: What requirements does the CSDDD stipulate?
The draft of the CSDDD outlines four specific areas of action in which a company should operate accordingly:
- Comprehensive due diligence for environmental and human rights
- Potential and actual impacts and risks on human rights and the environment must be identified, reported, and mitigated. This should also apply to subsidiaries along the value chain. In addition, the company’s management must take account of the relevant findings arising from the process in the strategy.
- National supervisory authorities in a European network
- Member states must establish appropriate supervisory authorities that are responsible for compliance with the legal requirements. These authorities should then be adequately networked with each other to ensure a consistent approach and imposition of fines.
- Linkage to the Paris Climate Agreement
- Group 1 companies within the scope of the directive must demonstrate a roadmap and strategy for mitigating global warming to 1.5 degrees per the Paris Climate Agreement.
- Civil liability
- In the future, injured parties along the value chain should be entitled to compensation from the responsible company, thus providing them with a civil remedy.
The Future of Sustainability in Supply Chains
The CSDDD draft can only be official if it’s approved. Various negotiation loops are taking place with stakeholders who want to see their perspectives integrated into the CSDDD. It is always a balancing act to ensure that the initiative does not degenerate into a toothless bureaucratic tiger and, simultaneously, does not demand the impossible from the industry. At the same time, everyone knows that global economic responsibility can no longer be externalized. Therefore, the EU has established the following timetable and roadmap regarding the CSDDD:
- By the end of 2022, the Council and the EU Parliament will have taken a clear position on the proposal and, if necessary, approved the law.
- On December 1, 2022, the Council will have adopted its negotiating position (“general approach”) on the Directive.
- By the end of 2024, member states shall implement the law into national law. The handover phase for companies begins.
- By the end of 2026, the transition phase for group 1 companies ends and they must comply with the directive.
- By the end of 2028, the transition phase for companies in group 2 ends and they must comply with the directive.
Enhancing Data Transparency with Suppliers
With the EU initiative already in Germany through corresponding legislation, corporate due diligence along the supply chain is moving closer to the compliance sphere in companies. In this course, digitizing the interrelated compliance processes will play an important role.
The Role of Digitization in Compliance:
- Automated reports for risk analyses
- Structured supplier surveys and assessments
- Systematic interconnection and exchange with suppliers along the value chain
- Data exchange along the supply chain for more transparency
With these emerging new requirements along the supply chain, it’s important for companies to have the infrastructure to support them and the resources to ensure compliance. At Cority, our Sustainability Cloud is helping support companies get compliant-ready and prepare for new regulations.