On February 23, 2022, the European Commission proposed a directive that sets requirements for environmental and human rights due diligence. The directive is known as CSDDD - or the Corporate Sustainability Due Diligence Directive.
The proposal is currently being processed in the EU, but below we give you an overview of the proposed directive and some of its most important topics.
What is the Corporate Sustainability Due Diligence Directive?
The CSDDD was born out of the EU's desire for mandatory due diligence in the areas of human rights, climate and the environment, as it is believed that the current reporting and non-binding initiatives are not sufficiently effective.
Some EU countries are already in the process of adopting national legislation in this area, and the goal of the CSDDD is therefore, among other things, to introduce common and unified requirements for European companies in order to avoid a fragmented market for due diligence.
Which companies will be covered by CSDDD?
As it currently stands, the following companies will be covered by the directive, CSDDD:
- EU companies with over 500 employees and a net turnover of more than €150 million.
- EU companies in high-risk sectors with over 250 employees and a net turnover of more than €40 million.
- Non-EU companies if they have a net turnover generated in the EU that exceeds the turnover thresholds above.
The above has yet to be approved and divergent proposals are pending in the EU; the Council proposes a gradual phasing-in model where the directive would initially apply to the largest companies, while the Legal Affairs Committee proposes lowering the thresholds for the scope of application.
Companies that fall below the above thresholds will not be directly affected by the directive, but it will still have an impact for many. This applies, for example, to smaller companies that are part of the value chain of a larger company that is covered by the CSDDD.
What do companies need to deliver?
The CSDDD sets out rules for due diligence obligations, and the rules will apply to companies' activities, the activities of their subsidiaries and their value chain. 'Value chain' is defined in this context as 'direct and indirect established business relationships.'
Specifically, CSDDD will require companies to:
- Integrate due diligence into their policies, including
- describing the company's approach to due diligence in the short, medium, and long term
- developing a code of conduct to describe the rules and principles to be followed by the company as well as its subsidiaries
- describing the process of implementing due diligence and the measures taken to ensure compliance with the code of conduct internally as well as in the value chain
- Identify actual or potential negative human rights and environmental impacts
- Prevent and/or mitigate potential impacts and stop and/or reduce actual impacts
- Establish and maintain a complaints procedure
- Oversee the effectiveness of the due diligence policy
- Publicly communicate about due diligence work
In addition, the directive proposes a specific rule on corporate responsibility, whereby the board of directors and executive management must take into account the environmental, climate and human rights impacts in all management decisions.