Gamechanger in the European ESG Regulations: Corporate Sustainability Due Diligence Directive
In a transformative development for European ESG regulations, the Corporate Sustainability Due Diligence Directive mandates extensive due diligence by large companies, specifically targeting adverse environmental and human rights impacts across their value chain. This directive introduces civil liability and penalties, reshaping business practices. Once formally adopted by the European Parliament and the Council, the directive's holistic approach will extend globally, demanding proactive compliance from businesses to meet heightened ESG standards.
Negotiators from the European Parliament, the Council, and the European Commission reached a significant provisional agreement on the Corporate Sustainability Due Diligence Directive (“CSDDD” or “Directive”) on December 14, 2023. This long-awaited agreement marks a pivotal moment in the quest for enhanced human rights and environmental protections in the business. It will promote sustainable and responsible corporate behavior through the requirements that go beyond mere disclosure, demanding action, and imposing liability.
What is CSDDD?
The CSDDD is a directive that requires large companies to identify, prevent, mitigate, and account for actual and potential adverse environmental and human rights impacts within their entire value chain. The companies will undertake due diligence not only on their operations but also on their subsidiaries, and business partners. The companies will demonstrate that they adhere to the Paris Agreement on climate change.
The Directive will apply to the following companies (financial services will be temporarily excluded):
• EU Companies with more than 500 employees and a net global turnover of more than EUR 150 million.
• Non-EU companies with a net turnover of more than EUR 150 million generated in the EU.
The Commission will publish a list of non-EU companies that fall under the scope of the Directive.
The due diligence process will encompass the following steps:
1. Integrating due diligence into the policies and risk management systems
2. Identifying and assessing actual and potential adverse human rights and environmental impacts and prioritizing them
3. Preventing, ceasing, or minimizing actual and potential adverse impacts
4. Establishing and maintaining a complaints procedure
5. Assessing the effectiveness of measures by monitoring
6. Publicly communicating on due diligence
7. Providing remediation when necessary
8. Appointing an authorized representative (for non-EU companies)
Civil Liability and Penalties
The in-scope companies shall be liable for damage caused to a natural or legal person. In other words, the damaged stakeholders shall have the right to full compensation. The civil liability shall also cover the intentional or negligent failure of the company’s subsidiaries and direct or indirect business partners to comply with the obligations of the CSDDD. They shall be jointly and severally liable. Furthermore, the fines to be imposed on companies will be determined by taking into account the company's worldwide net turnover.
In the next step, the provisional agreement will be endorsed and formally adopted by the European Parliament and the Council.
The holistic approach of requirements covering the business chain will extend the scope of the CSDDD beyond the EU. A business partner or a supplier of an in-scope EU company will have to comply with the CSDDD standards. Once implemented, the CSDDD might even be a prerequisite for accessing the EU market. This may also pave the way for new collaborations. The in-scope EU companies may prefer to establish partnerships with businesses that have adapted their operations accordingly. Nevertheless, there will be increasing demands from customers, the media, as well as regulatory bodies, and governments worldwide for businesses to be more accountable for their actions. To catch the wave of emerging ESG regulations, companies globally should roll up their sleeves and proactively review and ensure compliance across their chain of activities.
Corporate sustainability due diligence: Council and Parliament strike deal to protect environment and human rights. (2023, December 14). Retrieved from European Council - Council of the European Union: https://www.consilium.europa.eu/en/press/press-releases/2023/12/14/corporate-sustainability-due-diligence-council-and-parliament-strike-deal-to-protect-environment-and-human-rights/
Note by the Council of the European Union No. 15024/1/22 REV 1. (2022, November 30). Retrieved from European Council - Council of the European Union: https://data.consilium.europa.eu/doc/document/ST-15024-2022-REV-1/en/pdf
Proposal by the Council of the European Union No. 6533/22. (2022, February 24). Retrieved from European Council - Council of the European Union: https://data.consilium.europa.eu/doc/document/ST-6533-2022-INIT/en/pdf
Kemal Altuğ Özgün
Tutku Şen Demirel