Deep Dive: The EU Corporate Sustainability Due Diligence Directive & Implications for Companies

On April 24, 2024, the European Union (EU) made strides toward greater sustainability with the Corporate Sustainability Due Diligence Directive (CSDDD). This directive, which officially went into effect on July 25, 2024, binds companies to integrate human rights and environmental stewardship into their operational DNA, from supply to distribution. It aims to create a fair competitive environment while promoting ethical business practices across the EU.

Does the CSDDD Apply to My Organization?

For EU-based companies and non-EU entities with significant operations in the EU, the CSDDD is applicable if they:

• Average over 1,000 employees and have a global turnover exceeding €450 million over the past two years.
• Generate more than €22.5 million from royalty agreements within the EU and have a global turnover above €80 million.

By implementing these criteria, the directive ensures non-EU companies adhere to similar ethical standards, maintaining fair competition.

Operational Scope and Due Diligence Duties

The directive emphasizes the importance of scrutinising the activities of business partners through the supply chain, from extraction and production to distribution. Companies are required not only to manage direct operations, but also to mitigate negative externalities resulting from indirect business relationships.

Process and Responsibilities for Companies

In order to be compliant with the directive, companies must focus on the following tasks:

• Identification and prevention. Undertake due diligence to spot and address potential human rights or environmental risks.
• Mitigation and remediation. Actively manage identified risks and offer remedies for adverse impacts.
• Climate transition planning. Align business operations with climate goals, specifically limiting global warming to 1.5°C.

The directive also establishes a civil liability framework, ensuring victims of adverse impacts have access to justice and companies are held accountable for damages.

Background: Policy Context for the CSDDD

The CSDDD is grounded in the EU’s environmental commitments, significantly shaped by the 2015 Paris Climate Agreement and the 2019 European Green Deal. Codifying these goals into legislation, the European Climate Law sets ambitious targets: achieving climate neutrality and reducing net greenhouse gas emissions by at least 55 per cent by 2030.

The directive is designed to work in tandem with the Corporate Sustainability Reporting Directive (CSRD), which standardises sustainability reporting across EU states. While the CSDDD lays down due diligence obligations, the CSRD ensures transparency through structured reporting.

Key Provisions in the CSDDD

Here are some provisions in the CSDDD that organisations should particularly be aware of so they can prepare.

• Article 5: Update codes of conduct with input from employees, especially in high-risk areas, in compliance with international humanitarian law.
• Article 6: Focus efforts to assess risks originating from all operations, prioritising those with higher severity.
• Articles 7-8: Develop mitigation measures tailored to the nature and influence of identified risks.
• Article 9: Install a transparent and accessible complaints mechanism for stakeholders.
• Article 10: Conduct periodic assessments of due diligence processes to ensure effectiveness.
• Article 11: Ensure effective communication of compliance through CSRD reporting or annual public statements.

What Happens Next?

As of October 2024, EU Member States are gearing up to incorporate the directive into their national laws, with a full transition deadline set for 2026. Being the largest legislative effort of its kind, the directive places substantial responsibilities on businesses to align with these new frameworks, ensuring sustainable and ethical operations across the board.

As a directive, the CSDDD must be transposed into Member State national law within two years, a crucial step for the directive’s provisions to apply in full.

For professionals in government affairs, staying current with these regulations is essential. The policy landscape is always in flux, and understanding the implications of these changes is crucial for navigating policy, regulation, and political obstacles. With the help of global policy solutions, including EU Issue Tracker’s policy discovery and tracking system, teams can gain actionable intelligence on how to navigate complex policy environments and stay ahead of potential challenges. FiscalNote Professional Services provides insights with our award-winning policy analysis delivered right to your inbox.