Download this article in PDF format.
Any organization that does business in the European Union (EU) is facing some new supply chain-related requirement this year. The Corporate Sustainability Due Diligence Directive (CSDDD) went into effect in May, with the goal of raising the bar for environmental and human rights practices in global supply chains.
The ambitious directive represents the most robust attempt to date to manage the risks and impacts of corporate value chains across all supplier tiers. "This feels like a sizable shift from how 99 percent of corporate sustainability teams are operating," BSR’s Diana Wilkinson told Greenbiz.
Here are seven things to know about the new directive and the impacts that it may have on your organization:
- What the rules are about: The new rules will ensure that companies that must comply with those rules identify and address adverse human rights and environmental impacts of their actions inside and outside Europe.
- The CSDDD establishes a corporate due diligence duty: The core elements of this duty are identifying and addressing potential and actual adverse human rights and environmental impacts in the company’s own operations, their subsidiaries and, where related to their value chain(s), those of their business partners
- The focus is on climate neutrality: In addition, the new rule sets out an obligation for large companies to adopt and put into effect, through best efforts, a transition plan for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement, as well as intermediate targets under the European Climate Law.
- It’s targeted at large organizations: In its final version, CSDDD will apply to European companies with at least 1,000 employees and $489 million in annual revenues, which includes about 5,400 companies. It also covers businesses based outside of the EU that generate at least $489 million in sales in the European market, Greenbiz reports.
- For now, at least, small companies won’t be impacted: Micro-companies and small to mid-sized businesses aren’t covered by the proposed rules. However, the directive provides supporting and protective measures for SMEs, which could be indirectly affected as business partners in value chains.
- Compliance won’t be cheap: The costs of establishing and operating the due diligence process may include (but aren’t limited to) transition costs, including expenditure and investments to adapt a company’s own operations and value chains to comply with the due diligence obligation, if needed.
- Enforcement strategies vary: Following the rules on corporate sustainability, due diligence will be enforced through administrative supervision, with member states designating an authority to supervise and enforce the rules, including through injunctive orders and effective, proportionate and dissuasive penalties (in particular fines). Member states will also ensure that victims get compensation for damages resulting from an intentional or negligent failure to carry out due diligence.
Leveling the Playing Field
These new EU rules are expected to provide a uniform legal framework and ensure a “level playing field” for companies across the EU single market. Such rules will also foster international competitiveness, increase innovation and ensure legal certainty for companies addressing sustainability impacts. “The CSDDD will steer businesses towards responsible behavior and could become a new global standard with regard to mandatory environmental and human rights due diligence,” the European Commission points out.
The Commission also says that one-third of companies recognized the need to act and are taking measures to address adverse effects of their actions on human rights or the environment, but progress is slow and uneven. “The increasing complexity and global nature of value chains makes it challenging for companies to get reliable information on business partners’ operations,” it adds. “The fragmentation of national rules on corporate, sustainability-related due diligence obligations further slows down the take-up of good practices.”
