The EU’s Corporate Sustainability Due Diligence Directive (CSDDD), has put forward a legislative framework to oblige companies. Including those in financial services, to demonstrate what action they are taking to protect the environment and human rights.
‘Sustainability’ goes beyond just climate. The role that businesses can play in protecting both the environment and supporting broader issues. Such as human rights has caught the attention of politicians, investors, consumers, and other stakeholders.
What is the CSDDD?
The CSDDD introduce requirements for companies to identify and prevent, bring to an end, or mitigate the actual and potential impacts of their activities on the environment and on human rights abuses. It oblige them to conduct due diligence not just on their own operations, but also on the activities of their subsidiaries. And other entities in their value chains with which they have direct and indirect established business relationships. They need to develop and implement ‘prevention action plans’. Obtain contractual assurances from their direct business partners that they will comply with the plans, and subsequently verify compliance.
Who will be captured?
The proposal capture the following companies:
Group one: EU companies with more than 500 employees and a net worldwide turnover of more than EUR 150 million in the last financial year.
Group two: EU companies with more than 250 employees and a net worldwide turnover of more than EUR 40 million. Provided at least 50% of this turnover has generated in a high-impact sector. (`High-impact’ has defined by the Commission as manufacturing textiles, engaging in various agricultural activities, and the extraction of mineral resources.)
Group three: non-EU companies that generate a net turnover of more than EUR 150 million in the EU in the last financial year.
Group four: non-EU companies that generate a net turnover of more than EUR 40 million in the EU. And provided at least 50% of worldwide turnover has generated in a high-impact sector.
SMEs would not be directly in scope. But they could be affected in their capacity as contractors or subcontractors to any of the above companies.
As part of its aim to help the EU transition toward a more climate-neutral and green economy, the CSDDD will oblige some companies (those in groups one and three identified above) to ensure their business models and strategies are compatible with the Paris Agreement. Additionally, companies that identify climate change as “a principal risk for, or a principal impact of,” their operations would have to include emissions reduction objectives in their business plans.
For human rights due diligence, the CSDDD will align with existing international standards. These include the UN’s Guiding Principles on Business and Human Rights. The OECD Guidelines for Multinational Enterprises. And the OECD Due Diligence Guidance for Responsible Business Conduct.
What is the current state of the CSDDD?
The CSDDD has proposed by the European Commission in February 2022. In December 2022, the European Council finalised its position. Materially amending the scope of the Commission’s proposal and suggesting a less punitive approach to the enforcement measures:
Scope: the Council made amendments to add a three-year phase-in period and narrowed the scope, to capture only:
EU companies with more than 1,000 employees and EUR 300m net worldwide turnover. Both criteria being met for two consecutive financial years. And
non-EU companies with EUR 300m net turnover generated in the EU.
Finally on March 15, 2024, the European Council adopted the EU’s Corporate Sustainability Due Diligence Directive. However, even the European Parliament has to accept it.
(source: KPMG)
