How does the EU's revised Proposal for a Corporate Sustainability Due Diligence Directive impact Swiss & international business?

After prolonged negotiations, the European Parliament officially adopted the Corporate Sustainability Due Diligence Directive (CSDDD) in a significantly scaled-down version in its plenary vote on April 24, 2024.

Essentially, the EU Directive applies to EU-based and international companies that meet certain criteria on size, such as the number of employees and/or turnover. Additionally, it extends to companies that are direct or indirect business partners of the entities falling within the scope of the Directive. The primary focus is on the chain of activities of companies by imposing due diligence obligations on the entities within scope and their business partners to address potential adverse human rights and environmental impacts.

Even if a Swiss or international company is not directly subject to the requirements of the Directive, it is advisable to review the business relationships and proactively implement human rights and environmental due diligence processes considering international standards, and to enhance transparency along the value chain. This will enable companies to meet the demands of their European customers, maintain competitiveness, and enhance their level of preparedness for future legislations in this field.  

Yesterday, on April 24, the European Parliament (EP) adopted the Corporate Sustainability Due Diligence Directive (CSDDD), albeit in a significantly reduced form. The agreement covers a smaller number of companies both within the EU and outside of the EU than in the initial proposal. The implementation will be gradual, slowly increasing the thresholds for in-scope entities over a period of five years, resulting in a slower phase-in of the due diligence obligations.

The Directive will now require formal adoption by the Council before being published in the Official Journal and entering into force 20 days later. EU Member states will have two years to transpose the new rules into their national laws.

What are the potential consequences of the CSDDD for Swiss (international) companies? 

Companies directly (legally) in scope of the CSDDD 

The Directive will first apply in 2027 to EU companies with a minimum of 5000 employees and a worldwide turnover of more than EUR 1500 Mio in the preceding financial year. Until 2029, the scope will gradually be expanded to companies with a minimum of 1000 employees and a worldwide turnover of EUR 450 Mio. The Directive also applies to non-EU companies that meet the same turnover thresholds in the EU. Special provisions also apply to ultimate parent companies in groups that meet these thresholds, as well as for franchising or licensing agreements. 

If a company itself or the ultimate parent company meets these thresholds, it is required to carry out risk-based human rights and environmental due diligence. In accordance with international standards such as the OECD Due Diligence Guidance for Responsible Business Conduct or the UN Guiding Principles on Business and Human Rights, this should cover the following steps:  

1. integrating due diligence into policies and management systems, 
2. identifying and assessing adverse human rights and environmental impacts, 
3. preventing, ceasing, or minimising actual and potential adverse human rights and environmental impacts, 
4. monitoring and assessing the effectiveness of measures, 
5. communicating, and
6. providing remediation.

The individual measures a company is required to take under these steps refer to its “chain of activities” (see definition below) and their appropriateness is determined by the company's impact on the identified risks.  

Companies indirectly in scope of the CSDDD  

The due diligence measures required of companies within the framework extend to the entire chain of activities, giving rise to specific requirements for business partners that are not subject to the Directive but have direct or indirect business partnerships with in-scope entities. This may have implications for Swiss companies selling goods to larger EU-based companies, given the export-oriented nature of the market.

The Directive defines the chain of activities as activities which include both, the operations of upstream and downstream business partners of a company, outlining two distinct types of business partnerships: 

1. Direct business partners with whom the company has a commercial agreement in place, and
2. Indirect business partners who perform business operations related to the operations, products or services of the company.

Below is a sample list of responsibilities for companies within the scope of the Directive and how they may translate into obligations for both direct and indirect business partners involved in the chain of activities of the companies: 

1. Risk assessment:

Companies are required to map their business partners throughout their chain of activities to identify potential adverse impacts. To avoid being classified as high-risk business partner, transparent communication of the supply chain activities and the measures to prevent adverse impacts is critical.

1. Contractual assurances:

The Directive expands on the current practice of requiring suppliers to agree to the code of conduct by stipulating that contractual assurances must be accompanied by suitable measures to verify compliance. This may involve delegating certain responsibilities outlined in the Directive to the business partner. Consequently, business partners will be obligated to contractually agree and potentially provide audit and other information rights. 

1. Enhanced purchasing and distribution practices:

The Directive requires companies to implement business plans, strategies, and operations that encompass both purchasing and distribution practices, and develop and utilize policies that align with their due diligence obligations, which are regularly monitored by appropriate KPIs. As a result, business partners may encounter sustainability criteria in tenders and may be required to meet specific KPIs for long-term business relationships.

1. Targeted and proportionate support to (SME) business partners:

The Directive requires affected companies to assist their SME business partners to fulfil the necessary obligations. Suppliers are recommended to take advantage of this option and embrace a collaborative approach by jointly implementing projects. This will ensure the effective implementation of the requirements and meeting expectations of the companies falling within the scope of the Directive.

To ensure compliance and competitiveness, companies should review their business relationships for connections with in-scope entities and conduct a risk assessment of their chain of activities.

In addition to the CSDDD, there is an increasing number of regulations concerning sustainability due diligence. To effectively address the resulting obligations from both a legal and business perspective, we highly recommend establishing robust human rights and environmental due diligence processes based on internationally recognized standards such as the OECD Due Diligence Guidance for Responsible Business Conduct or the UN Guiding Principles on Business and Human Rights. By doing so, companies can establish a solid foundation to promptly respond to the diverse laws and requirements of their customers.

Some laws are specific to certain sectors or rights, while others are comprehensive, encompassing all sectors and aiming to protect human rights and environmental considerations in a general sense. Therefore, it is crucial to be prepared for various requirements from different stakeholders and legislators by implementing and continuously improving human rights and environmental due diligence in accordance with international standards. 

Legislative developments to look out for:  

1. Comprehensive sustainability due diligence laws (cross-sector & broad rights covered) 
   • French Duty of Vigilance Law
   • German Supply Chain Duty of Care Act
   • Norwegian Transparency Act
2. Sector- or rights-specific sustainability due diligence laws
   • Proposal for an EU ban on products made with forced labor adopted by the European Parliament on 24 April 2024
   • EU Conflict Minerals Regulation 
   • Swiss regulation on due diligence and transparency regarding minerals and metals from conflict areas and child labor 
   • EU regulation on deforestation-free products 
   • US Uyghur Forced Labor Import Ban (UFLPA) 
   • US & Canadian Forced Labor Ban based on Customs Tariff

All regulations in the field of sustainable trade are based on the same principle: transparency in the supply chain. Companies must have a clear understanding of their supply chains, identify risks and address these through effective measures. The use of technological solutions can mitigate the risks. Deloitte's enhanced business partner due diligence tool can assist you in identifying risks in your business relationships, and providing a solid foundation for subsequent actions.

The tool goes beyond conventional screening practices by integrating human rights and environmental content. It also considers sector and country risk ratings, along with conducting adverse media checks. As a result, the tool generates comprehensive risk reports for your business partners. Based on the identified risks, we can assist you in defining appropriate measures that align with legal requirements and the expectations of your business partners.

Companies are confronted with increasing expectations from both business partners and legislators. Fortunately, globally recognized standards are available, including the OECD Due Diligence Guidance for Responsible Business Conduct and the UN Guiding Principles on Business and Human Rights, to help meet these expectations. Companies should seize this opportunity and utilize these guidelines to implement and continuously enhance their due diligence measures. By doing so, companies can ensure ongoing compliance and competitiveness in the ever-evolving business landscape.

If you would like to discuss this topic, please do reach out to our key contacts below.

Authors

• Philipp Weber-Lortsch - Director, Global Trade Advisory
• Gina Rüegg - Senior Consultant, Global Trade Advisory
• Benita Vosseler - Consultant, Global Trade Advisory