Updates on the Corporate Sustainability Due Diligence Directive (CSDDD)

Development of CSDDD The new compromise text for the Directive on Corporate Sustainability Due Diligence (“CSDDD”) was approved by the European Parliament’s Committee on Legal

Corporate Sustainability

Development of CSDDD

The new compromise text for the Directive on Corporate Sustainability Due Diligence (“CSDDD”) was approved by the European Parliament’s Committee on Legal Affairs on 19 March 2024.

The European Parliament and the EU Council had reached a provisional agreement on the initial proposal[1] aimed at reducing adverse effects on the environment and human rights globally and increasing activities supporting the protection of human rights and the environment on 14 December 2023, but following concerns from some member states, a new compromise was reached on 15 March 2024.(EU, 2023)

 

Both proposals fundamentally aim for companies to take measures to prevent and reduce adverse social and environmental impacts in their value chains. Ensuring the integration of sustainability concepts into corporate governance and management systems can be considered another main objective of the proposals. In the CSDDD, it is emphasized that decisions made by companies need to be evaluated within the framework of topics such as human rights, climate change, resilience, and negative environmental externalities. (Commission, 2022)

 

Companies operating in the EU are required to ensure compliance with the provisions of the CSDDD in their activities, those of their subsidiaries, and the activities of their direct and indirect business partners. Companies must take measures and develop practices to mitigate potential risks.

 

Companies subject to the directive should strive to minimize adverse impacts, considering the nature, severity, and relevant risk factors of the situation. Areas of focus for adverse impacts include issues related to human rights such as inadequate workplace health and safety, child labor, forced labor, inequality, and worker exploitation, as well as environmental impacts such as loss of biodiversity, greenhouse gas emissions, ecosystem degradation, and pollution. (Commission, Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, 2022) The company should take measures by evaluating factors such as the characteristics of its value chain and business operations, the sector or geographical conditions in which its business partners operate, the company’s power to influence its direct and indirect business partners, and whether the company can enhance its power of influence. (Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, 2024)

 

Process

The process of taking measures against adverse environmental and human rights impacts, as outlined in the due diligence guidance [2], consists of the following steps:

  1. Integrating the due diligence process into policies and management systems,
  2. Identifying and assessing adverse human rights and environmental impacts,
  3. Preventing, ceasing, or minimizing potential adverse human rights and environmental impacts,
  4. Monitoring and evaluating the effectiveness of measures,
  5.  Communication,
  6. Providing remediation. (Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, 2024)

 

Scope of CSDDD

With the current agreement, it is evident that the scope of companies covered by the temporary proposal adopted on December 14, 2023, has been significantly narrowed. The changes in threshold values for companies operating in the European Union and falling within the scope of CSDDD are as follows:

  • The threshold for the number of employees has been changed from 500+ to 1000+.
  • Turnover has been increased from EUR 150 million to EUR 450 million.
  • Companies with 250+ employees and a net turnover[3] of EUR 40 million worldwide have been increased to EUR 80 million. (Anahita Thoms, 2024)

 

Implementation Phase

Companies’ compliance with CSDDD will be carried out by the following staging:

  • Companies with more than 5,000 employees and a turnover exceeding 1.5 billion euros must comply within three years.
  • Companies with over 3,000 employees and a turnover above 900 million euros will have four years to adjust.
  • Companies with more than 1,000 employees and a turnover exceeding 450 million euros will be granted the longest application period of up to five years to comply. (Anahita Thoms, 2024)

 

Sanctions and Penalties

Governments are obliged to provide for effective, proportionate, and dissuasive penalties, including monetary penalties. In cases where a monetary penalty is imposed, the maximum limit of the imposed monetary penalty should be at least 5% of the company’s net worldwide turnover in the financial year preceding the decision. (Isabelle Van Damme, 2024)

 

Finally, the CSDDD will be presented for a vote in the plenary session of the European Parliament on April 24, 2024.

 

References

Anahita Thoms, K. F. (2024, March 18). European Union: Member states have reached an agreement on the Corporate Sustainability Due Diligence Directive. Lexology: https://www.lexology.com/library/detail.aspx?g=370e8dc7-f7b4-43ee-a35f-050b231f6e46 adresinden alındı

Commission, E. (2022, February 23). Corporate sustainability due diligence. European Commission: https://commission.europa.eu/business-economy-euro/doing-business-eu/corporate-sustainability-due-diligence_en adresinden alındı

Commission, E. (2022, February 23). Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937. Brussels, Brussels.

EU, C. o. (2023, December 14). Corporate sustainability due diligence: Council and Parliament strike deal to protect environment and human rights. Council of the EU: https://www.consilium.europa.eu/en/press/press-releases/2023/12/14/corporate-sustainability-due-diligence-council-and-parliament-strike-deal-to-protect-environment-and-human-rights/ adresinden alındı

Isabelle Van Damme, A. M. (2024, March 20). Corporate Sustainability Due Diligence Directive- update. Lexology: https://www.lexology.com/library/detail.aspx?g=c206d667-b4bf-4ba0-a11b-10d82bc4dbed adresinden alındı

Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937. (2024, March 15). Brussels, Brussels.

 

[1] Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, Brussels, 23.2.2022

[2] OECD Guidance on Responsible Business Conduct

[3] If more than 50% of these turnovers are generated from high-impact sectors such as textile, food production, food and beverage, mineral resources and metals, agriculture, forestry, fishing, lignite, natural gas, oil, metal ore extraction, etc.

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