The Corporate Sustainability Due Diligence Directive (CSDDD) is a legislative proposal by the European Union (EU) aimed at promoting responsible corporate behavior and addressing human rights and environmental impacts in global value chains. The directive, proposed by the European Commission in 2022, requires companies operating in the EU to identify, prevent, and mitigate adverse impacts on human rights and the environment across their operations, subsidiaries, and supply chains.

CSDDD is part of the EU’s broader strategy to promote sustainable business practices and corporate accountability, complementing existing regulations like the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy. By mandating human rights and environmental due diligence, the CSDDD seeks to ensure that companies take responsibility for their global footprint and contribute to sustainable development.

Requirements for CSDDD

CSDDD introduces several key requirements that companies must adhere to:

Scope of application

• Large companies: The directive applies to EU companies with more than 500 employees and a net turnover of over €150 million. For non-EU companies, it applies to those generating a net turnover of over €150 million in the EU.

• Medium-sized companies in high-risk sectors: It also covers smaller companies (with more than 250 employees and a net turnover of over €40 million) if they operate in high-impact sectors, such as textiles, agriculture, and mineral extraction. However, these companies have a longer timeline for compliance.

• SMEs: While not directly in the scope, small and medium-sized enterprises (SMEs) are indirectly affected as they often form part of the supply chains of larger companies subject to the directive.

Due diligence obligations

• Human rights and environmental due diligence: Companies are required to conduct ongoing due diligence to identify, prevent, mitigate, and account for adverse human rights and environmental impacts within their operations, supply chains, and business relationships.

• Risk assessments: They must carry out risk assessments to identify potential and actual negative impacts on human rights (such as child labor, forced labor, or unsafe working conditions) and the environment (such as deforestation, pollution, or biodiversity loss).

• Adoption of due diligence policies: Companies must adopt and implement policies to address identified risks. This includes creating an action plan to prevent or mitigate adverse impacts and ensure compliance with internationally recognized human rights and environmental standards.

• Stakeholder engagement: Businesses are required to engage with stakeholders, including workers, local communities, and other affected parties, to understand the potential impacts of their operations and supply chains.

Implementation of due diligence

• Prevent and mitigate risks: Companies must take measures to prevent or mitigate identified adverse impacts. This can include adjusting business practices, incorporating contractual clauses with suppliers, or supporting remediation efforts for affected individuals and communities.

• Monitoring and reporting: Regular monitoring of the effectiveness of the implemented due diligence measures is required. Companies must report publicly on their due diligence activities, providing transparency about how they address human rights and environmental issues.

• Grievance mechanisms: Companies must establish or participate in grievance mechanisms to allow affected individuals or communities to raise concerns about human rights abuses or environmental harm.

Board responsibility and climate change plans

• Climate change plan: Large companies must adopt a plan to ensure that their business strategy aligns with the Paris Agreement's goal of limiting global warming to 1.5°C. This includes setting measurable targets for reducing greenhouse gas emissions.

• Director accountability: Directors of companies are responsible for overseeing the implementation of due diligence processes. They must consider the consequences of their decisions on human rights, climate change, and the environment.

Sanctions and enforcement

• Non-compliance penalties: Member states will define penalties for non-compliance, including fines and remediation orders. The severity of penalties is expected to depend on the nature and extent of the violation.

• Civil liability: Companies could be held liable for damages if they fail to fulfill their due diligence obligations, leading to human rights or environmental harm.

Steps to be taken for CSDDD compliance

To comply with CSDDD, companies must implement a structured approach to due diligence:

Develop a due diligence policy

• Policy creation: Develop a comprehensive human rights and environmental due diligence policy that outlines the company's commitment to sustainable practices and identifies key risk areas.

• Board approval: Obtain approval from the board of directors for the policy, ensuring that it aligns with the company’s overall business strategy.

• Integrate into operations: Embed the policy into the company’s operations and supply chain management processes, making sustainability a core aspect of business practices.

Conduct risk assessments

• Identify risks: Perform a thorough assessment of potential human rights and environmental risks within the company’s operations, supply chains, and business relationships.

• High-risk areas: Pay special attention to high-risk sectors and geographies where violations of human rights or environmental regulations are more prevalent.

• Update regularly: Risk assessments should be updated regularly to account for changes in operations, market conditions, or regulatory requirements.

Implement risk prevention and mitigation measures

• Develop action plans: Create specific action plans to address the identified risks. These plans may include revising procurement practices, enhancing supplier due diligence, or collaborating with stakeholders to promote better labor and environmental standards.

• Supplier contracts: Incorporate contractual clauses with suppliers and business partners to ensure compliance with the company’s sustainability standards and policies.

• Capacity building: Invest in training programs for employees and suppliers to raise awareness about human rights and environmental issues.

Establish grievance mechanisms

• Create grievance channels: Set up or participate in grievance mechanisms that allow affected individuals or communities to report concerns or violations related to human rights or environmental impacts.

• Respond promptly: Implement procedures to address grievances promptly, ensuring transparency and accountability in the resolution process.

• Continuous improvement: Use feedback from grievance mechanisms to refine and enhance due diligence policies and practices.

Monitor, review, and report

• Ongoing monitoring: Regularly monitor the effectiveness of due diligence measures. This includes assessing the performance of suppliers and partners in complying with sustainability standards.

• Annual reporting: Publicly disclose the company’s due diligence activities, risks identified, and actions taken to address human rights and environmental impacts. Reporting should be detailed, transparent, and accessible to stakeholders.

• Third-party audits: Engage third-party auditors to verify compliance with the due diligence policy and report findings.

Align business strategies with climate goals

• Climate plan: Develop and implement a climate change plan that aligns with the goals of the Paris Agreement, including setting targets to reduce greenhouse gas emissions.

• Board oversight: Ensure that the board of directors oversees the integration of climate-related goals into the company’s strategy and operations.

By adopting these steps, companies can proactively align with the CSDDD requirements, demonstrating their commitment to responsible business conduct and sustainable development. The directive emphasizes the need for companies to take a holistic approach to human rights and environmental due diligence, promoting corporate accountability and fostering a more sustainable global economy.