- Blog
July 19, 2024
Door Mark Buckingham, Adviseur Terugroepacties
In May 2024, the Council of the European Union formally adopted theCorporate Sustainability Due Diligence Directive(CSDDD), which will introduce mandatory sustainability and human rights due diligence requirements for many companies based in or operating in the EU.
The CSDDD is set to enter into force on 25 July 2024. While the threshold for in-scope companies was narrowed from the original proposal, the CSDDD will still have sweeping impacts for the companies within its scope.
Who is affected
Broadly, the CSDDDrequiresfirms, their subsidiaries, and their upstream and downstream supply chain partners to “end or mitigate their adverse impacts on human rights and the environment.” The approved directive applies to both EU and non-EU companies.
EU companies and parent companies with more than 1,000 employees and more than €450 million worldwide in annual turnover will be the biggest group affected. TheEuropean Commission estimatesthat approximately 6,000 large EU limited liability companies and partnerships fall into this category. Non-EU companies who generate more than €450 million in annual turnover in the EU must also comply with the CSDD. By the Commission’s estimate, this will impact 900 additional companies.
Micro companies and small and medium-sized enterprises (SMEs) are not subject to the proposed rules. However, there are supporting and protective measures for SMEs that could impact them indirectly as business partners in value chains.
Key requirements
The CSDDD introduces a corporate due diligence duty requiring in-scope companies to identify and address “actual and potential human rights adverse impacts and environmental adverse impacts.” Companies will not only have to identify and address these impacts in their own operations, but also in the “operations of their subsidiaries and the operations of their business partners in their chains of activities.”Attorneys with White & Case LLP explain that thismeans companies will be responsible for due diligence over their subsidiaries and upstream business partners regarding the production of goods or the provision of services, as well as over their subsidiaries and downstream business partners related to the distribution and storage of the product.
In addition to conducting risk identification and assessment for how operations may adversely affect human rights and the environment, companies must also implement measures to prevent and mitigate any adverse impacts they find. After the initial assessment, companies must continually monitor how effective their processes are and provide annual reports to allow stakeholders to evaluate the company’s commitment to sustainability.
The directive also requires companies to develop and implement a climate transition plan in line with theParis Agreement on climate change.
In addition to facing increased responsibility beyond their own operations, companies could also face steep repercussions for intentionally or negligently failing to comply with the CSDDD. In certain instances, regulators can impose a fine of up to five percent of a company’s net global turnover from the previous financial year. More notably, the CSDDD introduces civil liability for damages caused by a company breaching their due diligence obligations, which will require the company to fully compensate any victims. Entities may also be excluded from public tenders and procurement processes within the EU.
Vooruitblik
After 25 July 2024, Member States will have two years to transpose the CSDDD into national law. The CSDDD will apply in phases beginning in 2027 with those larger companies that have 5,000 employees or more. It will apply to the final group, the smallest companies and all franchisors and licensors, on 26 July 2029.
Member States face minimum harmonisation requirements for the CSDDD, so national law created when transposing the CSDDD cannot lower the level of protection nor can existing national law be reduced if the level of protection is above that offered by the CSDDD. Several Member States, including Germany, France, and Norway, have existing due diligence legislation. With the CSDDD provision allowing Member States to introduce stricter obligations or a wider scope for corporate due diligence duty, it is possible that other Member States will introduce their own legislation. However, the European Commission hopesthe new ruleswillestablish a uniform legal framework and level the playing field for companies across the EU.
In the past few years, the EU has prioritised due diligence legislation protecting human rights and the environment, as we’ve seen with the Deforestation Regulation, the Forced Labour Regulation, and others. Legislators are also expanding the responsibilities companies have for the full product lifecycle, including activities of their partners and suppliers. Companies should take this cue to audit their existing due diligence and risk assessment frameworks to not only ensure compliance with legislation, but also to get ahead of any future requirements. In addition, they should take steps in ensure other companies they do business with are taking the same precautions.
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Tags: Brand, Brand protection, Brands, Carrier, Compliance, environment, Environmental impact, Europe, European Union, legal, Legislation, regulation, regulations, Regulatory, Risk, sustainability
