As matter of facts EU CSDDD will affect companies, but how is this going to happen? Here you can find the answer
Following the introduction of the Corporate Sustainability Reporting Directive (CSRD) and the Carbon Border Adjustment Mechanism (CBAM), on May 24th 2024, the European Union approved the Corporate Sustainability Due Diligence Directive (CSDDD), which aims to ensure businesses respect human rights and environmental standards throughout their supply chains.
But what is the CSDDD, and how will it impact businesses? Let’s find out.
Understanding the EU CSDDD
The ultimate goal of the Corporate Sustainability Due Diligence Directive is to harmonize the due diligence standards across the EU, creating a level playing field for organizations and reducing the competitive disadvantage for companies already practicing responsible business conduct.
To do so, the Directive focuses on identifying, preventing, mitigating, and accounting for adverse human rights and environmental impacts throughout an organization’s operations and supply chains.
Regarding market impacts, the regulation will apply to EU companies with more than 1000 employees and a net turnover exceeding 450 million € worldwide, as well as non-EU companies with a net turnover exceeding 450 million € in the EU.
As of today, it is estimated that approximately 6.000 large EU limited liability companies and around 900 non-EU companies operating within the EU will be directly affected by the CSDDD.
This broad scope underlines that the directive will influence a significant portion of the EU economy, potentially affecting millions of workers and numerous business relationships across various sectors. However, the directive will be enforced through a phased implementation approach, with the largest companies expected to comply by 2027 and smaller companies by 2029 in order to allow businesses to gradually adapt their processes and systems to meet the new requirements, reducing the immediate burden of compliance.
Key Obligations under the Directive
- Due Diligence Policies:
Companies must integrate due diligence policies into their corporate governance frameworks, conducting regular assessments of potential and actual adverse impacts - Stakeholder Engagement:
Meaningful engagement with stakeholders, including employees, affected communities, and civil society organizations, is essential throughout the due diligence process - Preventive and Remedial Measures:
Businesses are required to implement measures to prevent or mitigate identified adverse impacts and, where necessary, provide remediation - Reporting and Transparency:
Companies must publicly report on their due diligence activities annually, ensuring transparency and accountability
Impact on Businesses
The EU CSDDD's implications for the involved businesses are profound, necessitating significant changes in how companies manage their operations and supply chains.
Enhancing supply chain visibility is one of the primary challenges, as companies must develop robust mechanisms to trace and monitor the environmental and human rights impacts across their entire chain of activities, from raw material sourcing to product distribution. This challenge is compounded by the Directive's lack of specific guidance on mapping out value chains, requiring companies to develop their methodologies.
Additionally, the Directive mandates that businesses identify both their direct and indirect business partners, necessitating an understanding of Tier 1 through Tier 4 suppliers.
Furthermore, businesses must invest in training and capacity-building initiatives to ensure their teams can effectively engage in the due diligence process. The effort includes upskilling procurement and sales teams to handle new responsibilities related to stakeholder engagement and impact assessments as the Directive requires companies to interact with a wide range of stakeholders, including whistle-blowers, NGOs, and workers in the value chain, and adapt their communication approaches to be timely, accessible, appropriate, and safe.
Financially, companies will incur costs related to establishing and maintaining due diligence procedures, mitigating adverse impacts, and providing remediation. However, these investments must not be seen as a burden as they are expected to yield long-term benefits, including enhanced risk management, improved corporate reputation, and increased attractiveness to sustainability-oriented investors.
The Directive also requires companies to design and implement a climate transition plan, pushing climate transition planning higher up corporate agendas. It is important to highlight that these plans must be updated annually to assess progress towards their targets, aligning with the EU CSRD’s disclosure requirements.
Lastly, while small and medium-sized enterprises (SMEs) are not directly within the scope of the CSDDD, they are likely to be impacted indirectly as larger companies will pass down due diligence requirements through their supply chains in a cascading effect that underscores the importance of SME to be prepared to ensure alignment and continued business relationships with larger companies.
Conclusion
The EU's Corporate Sustainability Due Diligence Directive marks a significant shift in corporate governance, emphasizing transparency, accountability, and sustainability.
While the CSDDD presents considerable challenges for businesses, from enhancing supply chain visibility to stakeholder engagement, it also offers opportunities for improved risk management and corporate reputation.
As companies adapt to these requirements, the directive is poised to foster a more responsible and sustainable business environment across the EU. Preparing now will not only ensure compliance but also position businesses favorably in a market increasingly driven by sustainability.
