Agreement reached on Corporate Sustainability Due Diligence Directive

In many ways, the CSDDD can be considered as the final piece of a puzzle, with the Corporate Sustainable Reporting Directive (CSRD) and the EU Taxonomy already in place. In the coming weeks, the text will need to be finalized before it will be formally approved by the Legal Affairs Committee and the European Parliament as a whole, as well as by the Council (EU governments) before it can enter into force.

Companies in scope

The directive will apply to:

• EU-based companies and parent companies of groups with over 500 employees and a worldwide turnover of more than 150 million euro.
• EU-based companies and parent companies of groups with over 250 employees and with a turnover of more than 40 million euro if at least 20 million euro is generated in one of the listed high-risk sectors
• Non-EU companies and parent companies of groups with equivalent turnover in the EU. For the first three years following the entry into force of the directive a transitional period is expected, meaning that only non-EU companies and groups that generate a net turnover in the EU of at least 150 million euro after that period will fall into scope.

Financial Sector and SMEs

One of the key points of divergence between the European institutions during the trialogue was the inclusion (as a whole) of the Financial Services Industry. As an outcome of the negotiations, the due diligence obligations in the directive will for the most part not apply to the Financial Sector for now. However, due diligence in respect of the own operations (upstream) is required from the Financial Sector. In addition, just like any other companies fully in scope, the obligations in respect of climate transitions plans (see below) will apply in full to the Financial Sector.

Small- and medium-sized enterprises (SMEs) are in principle excluded from the scope of the CSDDD, except to the extent that they have to report to another in-scope company or group as part of a value chain. For those obligations, it is expected that specific support for SMEs (such as general guidance, technical advice and possibly even financial support) will be made available.

Sustainability Due diligence

At the core of the directive is the obligation for companies to conduct Human rights and Environmental Due Diligence. A concept that was introduced by the UN Guiding Principles on Business and Human Rights in 2011 and has been a core component of the OECD Guidelines for Multinational Enterprises ever since. Building on those standards, sustainability due diligence within the context of the CSDDD, consists of the following steps:

• Having a due diligence policy in place and integrate it into corporate policies and procedures
• Take appropriate measures to identify actual and potential adverse human rights and environmental impacts, arising from their own operations as well as through their business chain of activities which covers the upstream business partners of the company and partially the downstream activities, such as distribution or recycling
• Take appropriate measures to prevent and mitigate potential adverse impacts, and to bringing actual adverse impacts to an end. This means that companies are required to engage with the party in the value chain closest to the (potential) adverse environmental or human rights impact, and to use their power and leverage under large contracts to effect change. Only in an ultimate scenario, companies should totally disengage with the relevant value chain partner. Companies should also pay out remediation where due.
• Provide the possibility for persons and organizations to submit complaints where they have legitimate concerns regarding actual or potential adverse human rights impacts and adverse environmental impacts
• Carry out periodic assessments of their own operations and measures to monitor the effectiveness of the identification, prevention, mitigation, bringing to an end and minimization of the extent of human rights and environmental adverse impacts.
• Communicate publicly on the due diligence on an annual basis. For companies that are also covered by the CSRD, reporting should take place via the ESRS framework.

Also meaningful engagement with affected stakeholders (including a dialogue and consultation) will form part of the due diligence process under the CSDDD.

Climate transition plan

The CSDDD will also require in-scope companies and groups (as well as qualifying companies in the Financial Sector) to adopt and put into effect a so-called climate transition plan. This plan is to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement. The plan has to include concrete targets and measures that will lead the company’s value chains to climate neutrality in 2050, in five years’ steps starting in 2030. In addition, the CSDDD will require the efforts in respect of the climate transition plan to be made part of a company’s (management) remuneration policy.

Enforcement

A twofold enforcement mechanism will be included in the CSDDD. First, administrative supervision on compliance will be conducted by a supervisory authority to be appointed in each member state. These supervisory authorities will have the power to impose administrative fines of up to 5% of a company’s turnover. Second, where a negative environmental or human rights impact occurs, the CSDDD will provide aggrieved parties (whether or not represented by a trade union or societal organization) with a basis to start (civil) legal proceedings against any company in scope of the CSDDD that is part of the value chain that caused the damages. The CSDDD will further support the affected parties through limitations on required evidence, injunctive measures, and a possible order to pay the claimants’ full costs of the proceedings.

Link to the existing EU regulatory framework

Although not all companies in scope of the CSRD are also in scope of the CSDDD, Sustainability due diligence is already referenced in the ESRS framework under the CSRD. It is clearly stated that the findings of this process should inform the double materiality assessment and companies already need to disclose information on how this due diligence process is implemented. However, the CSRD and ESRS do not impose any conduct requirements in that regard. Once the CSDDD will come in affect, companies will need to comply with the different steps mentioned before. With regard to the EU Taxonomy Minimum Safeguards, the Platform on Sustainable Finance already indicated that ‘if the CSDDD proposal becomes law and a significant overlap and alignment with Article 18 standards is maintained, compliance with the law would in the future serve as a proxy for Article 18 alignment on human rights, including labour rights by companies'. 

And also for companies that fall outside of the currents scope for CSDDD, the final adoption of the directive will further shape the expectations around Human Rights and Environmental Due diligence as required by many other standards and regulatory initiatives. Furthermore, the CSDDD links up seamlessly with current and proposed EU-legislation such as the Deforestation-free Products Regulation, the Conflict Minerals Regulation and the (draft) Forced Labor Market Ban Regulation: while the CSDDD aims to prevent production causing adverse environmental and human rights impacts, the latter regulations aim to prevent any products that are the results of such impacts from being put onto the EU market.

How we can support

At Deloitte we have been supporting companies with conducting human rights and environmental due diligence for many years. As we have advised companies on applicability of regulations and the consequences thereof . We can provide assistance in all parts of the due diligence process; from process design, through implementation, to assessment and reporting. Please contact our colleagues via the contact details below if you would like to learn more.