Author: Mercedes Sanchez Varela (Director of the Board of Chapter Zero Brussels)
The Corporate Sustainability Due Diligence Directive (often referred to using the acronyms CSDDD or CS3D) represents a pivotal moment in shaping how companies navigate their environmental and human rights responsibilities within their value chains.
The new rules will ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe.
The aim of this Directive is to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance. For the first time, a mandatory framework is being set for this purpose and has recently (14 december) been agreed on by the European Parliament and Council.
In term of timing, the directive publication could happen as early as Q2 2024 and its implementation is foreseen for Q1 2026, with a possible transition time for non EU companies.
These rules are part of the EU’s broader push to promote a shift to sustainable business practices and do align with the existing CSRD, EU taxonomy and deforestation regulation and the proposed directive to ban products made with forced labour.
The discussion around the proposal was highly debated around the following points:
The inclusion of director’s duties were finally scrapped from initial commission drafts that referred to the director’s fulfilling their duty to act in the best interest of the company, and the need to take into account the human rights, climate change and environmental consequences of their decisions.
Resistance was built up on the fact that the directive is adding to existing legislation in some member states ( eg French duty of vigilance or Germany Supply chain duty of care) and that exisiting legislation was already sufficient at this stage.
The debate concentrated later around the inclusion of the financial sector on the scope of the directive, notably on its upstream (lending and investment) activities.
The agreement on the directive included:
Corporations will have to carry out due diligence of upstream/downstream value chain and related risk mapping
The agreement mandates companies to adopt and implement climate plans, aligning with the Paris Agreement targets transitioning to the 1.5 degree warming target.
It will apply to companies with more than 500 employees and a worldwide annual turnover exceeding €150 million, with lower thresholds for specific risk sectors in sectors such as textiles, food manufacturing, trade of mineral resources, construction and agriculture,
Banks and financial operators are due to comply with a due diligence on their upstream activities which is exposing them in a very limited way. A review clause is however foreseen in few year’s time. Financial corporations will also be required to adopt and put into effect climate plans.
To note that the directive targets all companies active in the EU market, even if their headquarters is outside the EU. The Commission will have to publish a list of non-EU companies that fall within the scope of the directive.
Once formally approved in the next months, the CS3D's due diligence obligations will be enforceable through reparations in European courts and sanctions by national supervisory bodies, up to 5% of a company's global turnover.
In so far as companies are (already today) engaging on climate and sustainabile practices, this directive complements existing requirements for which they are already subject to. CS3D is accelerating the speed and enlarging the scope and accountability for companies to deepen ESG related information and fully understand and be transparent with the ESG risk likely to impact them.