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by
Alexander Olding
- December 15, 2023
The upcoming implementation of the European Commission’s Corporate Social Due Diligence Directive (CSDDD) represents an important milestone in tightening up the environmental and human rights impacts at the corporate level and acting as a complementary piece of legislation to the Corporate Sustainability Reporting Directive (CSRD). Once enacted, it is expected the CSDDD will mandate that companies establish comprehensive due diligence processes to address their direct impacts on a range of social and environmental issues, including slavery, child labor, labor exploitation, biodiversity loss, pollution, and environmental degradation.
Introduced in February 2022 and now in a negotiating phase, the European Parliament, the EU Commission, and the EU Council are expected to determine the final text of the legislation in Q4 of 2024. After this, Member States will have a two-year period following the directive’s entry into force to implement the CSDDD into their national law by 2026.
Some of key points that are being discussed in the negotiation phase include:
- Entities Subject to Compliance: Defining which entities are obligated to comply with the CSDDD.
- Scope of Obligations: Determining the scope of applicable obligations, including what constitutes an “established” business relationship and the extension of obligations to downstream companies.
- Director’s Duties: Clarifying the responsibilities of directors in ensuring compliance.
- Enforcement Mechanisms: Addressing the enforcement of obligations, including civil liability rules and sanctions.
Under the proposed CSDDD, companies will be required to conduct due diligence to identify, prevent, mitigate, or end the negative impact of their activities on human rights and the environment. Furthermore, companies will need to monitor and assess the impact of their value-chain partners, including suppliers, sales, transport, distribution, storage, and waste management. [1]
Role of the Supply Chain in CSDDD
Considering the upcoming implementation of the CSDDD, expected to be some time in Q4 2024, companies are advised to adopt a proactive stance in preparing for the upcoming requirements. This entails integrating specific measures within their value chain to align with transparency expectations and comply with existing legislation. Companies will also be expected to collaborate more closely with their business partners across their value chain and ensure they have the necessary resources to reliably share information. By establishing a comprehensive due dilligence process and collaborating with business partners, companies can successfully adapt to the new requirements and continue to grow sustainably. [2]
Case Study: Peruvian Cacao and Mining
In Peru for example, the cacao industry is beginning to adapt and prepare for new European regulations such as the CSDDD, which is also designed to prevent illegal deforestation. With the growing global demand for agricultural commodities as a driving factor for deforestation, new ‘no deforestation’ regulations from the EU that will work alongside the CSDDD will help to ban imports of agricultural products such as Cacao which carry a sustainability produced label but are linked with cultivation on illegally deforested land. [3]
The EU Deforestation Regulation (EUDR) is an example of this no deforestation legislation which directly prevents traders from importing specific products such as cacao if they have not met stringent criteria. These criteria include being certified as “deforestation-free,” produced in adherence to the relevant legislation of the country of origin and covered by a comprehensive due diligence statement which will be a mandatory requirement now with the CSDDD for any company doing business in the European Union. [4] Of course, this regulatory development is integral to the broader EU legislative agenda that is the CSDDD which will address a company’s full value chain and will thus enhance accountability and sustainability across the supply chain.
From a broader perspective, setting a proper due diligence strategy could be a key differentiator on a company’s product being accepted in the EU. From a monitoring initiative standpoint, companies should look to conduct thorough assessments of their environmental compliance to ensure every step of their supply chain meet the existing legislative requirements but also when CSDDD is eventually implemented too. In another example of its application the CSDDD could represent an important contribution to minimizing the negative impacts of mining operations in Espinar, Peru on human rights defenders, rural and indigenous communities, and the environment and help promote better corporate accountability and fair justice (CSR). [5]
Key Considerations for Supply Chain Transparency
To best prepare for the upcoming CSDDD there are a series of steps companies can take:
- First, mitigating adverse impacts: As part of a company’s compliance with CSDDD, a prevention plan should cover contractual assurances, with business partners and support and collaboration with smaller SME’s down the value chain.
- Second, preventing further environmental impact: Companies should aim to create a plan that aligns their business model and strategy with the transition to a sustainable economy, aiming to limit global warming to 1.5°C as per the Paris Agreement and any regional or domestic targets set by their local jurisdiction. The plan to prevent further environmental impact should evaluate the company’s climate change risks and impacts, and if deemed significant, it should incorporate emission reduction goals.
- Third, when adverse impacts are discovered by companies, corrective measures such as impact neutralization, damage compensation, and implementing corrective action plans should be implemented. Where necessary companies may look to apply good practice measures such as terminating commercial agreements with a party causing adverse impacts. This may be in relation to human rights abuses which is a core area of focus with the CSDDD.
- Finally, anticipating a proper complaints procedure, where customers, interest groups, suppliers, trade unions and other stakeholders can report complaints regarding human rights and environmental impacts caused by the company, or business relationship, operations.
Challenges for Developing Countries.
In the ongoing negotiation phase of the CSDDD, the robust components that have shaped the directive thus far carry the potential to introduce legal uncertainties, escalate compliance costs, and, notably, dissuade smaller businesses with limited financial resources from adhering to the requirements, particularly in developing economies. Consequently, this could result in an uneven playing field allowing larger, financially capable companies to do business in the EU while hindering smaller enterprises from accessing the European market due to their inability to comply with CSDDD standards. In response to this challenge, there is a growing call for the EU to extend development assistance, offering capacity building and technical support to companies lacking the necessary resources.
Second, recognizing effective due diligence, collaboration across the entire value chain is important. The CSDDD acknowledges the diverse sustainability challenges faced by different sectors and, accordingly, incorporates sector-specific obligations. The directive actively encourages collaboration among companies within each sector, helping to provide a more collective approach to addressing sustainability challenges and sharing best practices. [6]
Nonetheless, the CSDDD represents a significant shift in corporate accountability and sustainability practices within the European Union. Companies should take note and begin their preparation to the regulatory changes and proactively align their operations with the forthcoming requirements to ensure compliance and maintain their commitment to meeting the core focus of mitigating environmental and social impacts.
Sources
[5] https://eulatnetwork.org/case-study-mining-in-peru-the-case-of-espinar/
[6] https://www.eivee.io/resources/the-eu-corporate-sustainability-due-diligence-directive-csddd
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