The Corporate Sustainability Due Diligence Directive (CSDDD) is a groundbreaking initiative by the European Union, creating a comprehensive framework for large corporations to identify, prevent, mitigate, and account for negative human rights and environmental impacts in their operations and supply chains. The directive enforces visibility beyond the first-tier of suppliers and represents a significant leap forward in global efforts towards sustainability and ethical corporate behavior.
At its core, the CSDDD is about more than just compliance; it’s about fostering a culture of responsibility. The directive obliges companies to align their business strategies with global warming mitigation, adding a new layer to the responsibilities of corporate directors. Now, they must oversee the implementation of due diligence processes, keeping an eye on both the environmental and human rights consequences of their decisions.
The Corporate Sustainability Due Diligence Directive is more than a new set of rules; it’s a call to action for corporations worldwide to take a stand against human rights abuses and environmental harm. The CSDDD is paving the way for a future where businesses are not just about profit, but about making a positive difference in the world.
Determine the negative impacts on human rights, the environment, and good governance that may result from their own activites as well as those of their value chains and corporate relationships.
Detect, prevent, mitigate, take responsibility for, and remdiate the aforementioned impacts.
Take appropriate and reasonable measures and make all efforts to prevent their value chains from negatively impacting human rights, the environment, and good governance.
Implement a due dilligence strategy and a risk analysis
Determine the negative impacts on human rights, the environment, and good governance that may result from their own activites as well as those of their value chains and corporate relationships.
Detect, prevent, mitigate, take responsibility for, and remdiate the aforementioned impacts.
Implement a due dilligence strategy and a risk analysis
In comparison to other national directives such as LkSG, Loi de Vigilance, or Norwegian Transparency Act, CSDDD defines a broader scope and goes further, by requiring both upstream and downstream due diligence.
The EU’s CSDDD makes it mandatory for companies to address social and environmental impacts within their supply chain—even those stemming from their own operations. Your company is affected by this directive if it falls under one of the following categories:
It is essential to emphasize that, while small and medium-sized enterprises may not be within the immediate purview of the EU CSDDD, they are subject to indirect ramifications. This arises from their obligation to adhere to standards in their capacity as suppliers to larger entities falling within the scope of the regulation.
In 2023, the CSDDD has made a significant progress in its legislative journey. The majority of Members of European Parliament supported an enhanced version of the initial legislative proposal from the EU Commission on June 1st, marking a critical milestone towards finalizing the directive.
The CSDDD is currently in the trilogue phase, where delegates from the European Parliament, the European Commission, and the European Council are working to agree on the directive’s final text. The undergoing negotiations between the Parliament and the EU Member States are expected to center around a key issue: the scope of CSDDD applicability. According to the proposals from the Commission and the Council, businesses that do not meet specific employee or net turnover criteria could still find themselves subject to CSDDD if they derive at least 50% of their net turnover from designated sectors, including agriculture, chemicals, clothing and footwear, fisheries, food and beverages, forestry, leather, live animals, metal products, mineral products, textiles, and wood.
In contrast, the Parliament is advocating for a comprehensive CSDDD that encompasses all sectors, even extending its reach to encompass financial services. The ensuing discussions promise to be both rigorous and illuminating. Although we can’t predict the exact timeline for the CSDDD, a trilogue decision is anticipated soon. Following agreement, the directive will move to implementation, mandating companies to adhere to its stipulations.
The JURI Report plays a pivotal role in shaping the Corporate Sustainability Due Diligence Directive (CSDDD). It serves as an indicator of the European Parliament’s stance on the CSDDD as the report is a product of the Parliament’s Committee on legal affairs (JURI). As such, it represents the collective views of the committee members on the directive.
In terms of amendments proposed, the JURI report potentially suggests that the European Parliament may move to include the financial sector within the scope of the CSDDD. This is a significant step as it expands the responsibility of due diligence beyond large companies to financial institutions. The implications of this amendment could be far-reaching: financial institutions, like banks and investment firms, may have to monitor and mitigate the adverse impacts of their activities on human rights and the environment. Furthermore, they’ll also need to ensure the sustainability of their suppliers.
This could lead to heightened accountability and transparency within the financial sector, fostering a more sustainable and responsible corporate culture. Yet, it also implies the need for these institutions to revamp their internal processes and strategies to align with the directive’s requirements.
At Prewave, we understand that in today’s European business landscape, the focus is shifting towards a balanced blend of economic prosperity and ethical accountability. We’ve seen the harsh repercussions of overlooking ethical and environmental protocols, igniting a passionate conversation about the role of businesses in society and the significance of sustainability and corporate responsibility. With 2023, the German Supply Chain Act (LkSG) has set a new precedent. It compels companies to acknowledge and mitigate any human rights infringements and negative environmental impacts in their supply chains. Complementing this, the European Union has introduced the Corporate Sustainability Due Diligence Directive (CSDDD), establishing further transparency and sustainability requirements across the EU.
Both LkSG and CSDDD aim to bolster sustainability and responsibility in global supply chains, acknowledging the vital role businesses play in shaping a sustainable economy and society.
LkSG emphasizes risk management, preventive measures, and reporting for products, services, and direct suppliers. Actions for subsidiaries and indirect suppliers depend on influence and substantiated risk knowledge. CSDDD broadens its scope, encompassing all direct and indirect suppliers along the value chain. It prioritizes risks based on severity and likelihood, transcending national regulations with a more comprehensive approach to human rights and environmental protection.
LkSG enforces compliance through penalties like exclusion from public procurement, fines based on violation severity, and up to 2% of annual sales for failure to address known violations. Fines up to EUR 8 million per case can apply for lacking complaint mechanisms or inadequate follow-up, and up to EUR 5 million for insufficient risk analysis. CSDDD grants member states the power to impose sanctions and penalties. The European Parliament’s current stance allows fines up to 5% of total turnover for non-compliance, with plans for a civil liability system and potential trade bans on affected products. Both regulations underscore the evolving landscape of corporate responsibility. As companies navigate these shifting tides, understanding the nuances of LkSG and CSDDD is essential for compliance and ensuring a sustainable future.
In addition to the employee and net turnover thresholds and the sectors under consideration, several topics are poised for negotiation between the Parliament and the EU Member States. One notable area of focus is sanctions and penalties.
Across all three proposals, sanctions and penalties will be determined by the respective EU Member State and are required to be effective, proportionate, and dissuasive. The Commission recommends that sanctions be linked to a business’s turnover, while Member States must publicly disclose CSDDD breaches.
The Council’s proposal specifies that pecuniary penalties should be based on a company’s worldwide net turnover, and CSDDD violations must be publicly accessible for a minimum of three years. Administrative authorities, selected by the Member States, may issue penalties and sanctions to companies that fail to comply with the CSDDD. Companies may be liable to pay a penalty of up to 5% of their global revenue.
Going a step further, the Parliament calls for a comprehensive set of measures and sanctions, including:
For companies under the scope of the Corporate Sustainability Due Diligence Directive (CSDDD), compliance is a significant challenge, particularly for large multinational corporations. Given the relatively tight 2027 implementation deadline, it’s crucial to start preparing your regulatory responses promptly if you haven’t already.
Although the CSDDD is not final, its core elements are unlikely to change significantly. Thus, your company can initiate ‘no regrets’ actions immediately, such as mapping existing due diligence policies and processes, outlining your value chain, identifying business partners (both direct and indirect), and assessing potential environmental and human rights risks.
With this information in hand, your company can lay the foundation for a gap analysis to assess your regulatory readiness. This analysis will guide you in determining what additional measures need to be taken and what adjustments should be implemented. By taking proactive steps now, your company can streamline the complexities of compliance and ensure that your efforts contribute to your long-term success, even as the regulatory landscape evolves.
At Prewave, we understand that due diligence is a complex process that involves comprehensive risk assessment and reporting. This is where we step in as your trusted partner and a leading end-to-end supply chain risk management solution.
Our all-in-one, AI risk and sustainability monitoring offers supply chain disruption mitigation, sustainability enhancement and sub-tier monitoring under one comprehensive solution. What truly sets us apart is our unique ability to provide meticulously curated commodity-based mapping and sub-tier monitoring while seamlessly incorporating data from other distinguished providers.
Our mission is to help your company navigate these new waters of compliance, mitigating risks proactively, and ensuring your operations align with the high standards set by the CSDDD. Download our FREE whitepaper to ensure a smooth and successful journey to your compliance with the upcoming CSDDD.
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