CSDDD: What does it mean for Businesses?

What is the Corporate Sustainability Due Diligence Directive (CSDDD/ CS3D)?

Adding to the ever-growing alphabet soup of ESG acronyms, the EU’s CSDDD, part of the European Green Deal, was given the greenlight on 1st June 2023 after a European Parliament vote. The directive establishes corporate due diligence (which goes beyond an organisations own operation to their subsidiaries and value chain) for organisations to assess their impacts, not only on the environment but also on human rights throughout their value chain.

Why does it matter?

While due diligence across supply chains is not a novel issue for companies, the CSDDD brings new challenges for compliance professionals and Boards who will now need to manage ESG issues across the entire value chain, including direct and indirect suppliers. Crucially, this avoids loopholes associated with ‘cascading contracts’ whereby liability for ESG impacts can be passed down the supply chain.

The directive emphasises the co-benefits of ESG; improved outcomes for people and planet as well as increased commercial performance and aims to establish clear lines of accountability, particularly for those companies with a global supply base.

Who does it apply to?

It is currently estimated that the CSDDD will affect around 17,000 companies. The new rules initially apply to EU-based companies with over 500 employees and more than €150 million in revenues, extending later to companies with over 250 employees and €40 million revenue. Non-EU companies with revenues earned in the EU above the thresholds would also be required to follow the rules.

It is worth nothing that although SMEs are not in direct scope of CSDDD, they will be indirectly affected as will be required to adhere to the standards as a supplier of larger companies that do fall within scope.

What do companies need to do?

· Carefully assess environmental and human rights impacts across your entire value chain and operations and establish processes to manage these impacts.

· Ensure appropriate governance structures and policies integrating supply chain due diligence are in place and engage with suppliers to raise awareness of the necessary procedures.

· Outline a climate transition plan explaining your strategy to reduce emissions in line with the Paris Agreement and address the physical risks associated with climate change.

· Disclose your progress on supply chain due diligence and emissions reductions, including any relevant data, in your external communications e.g. Annual Report.

What are the risks of non-compliance?

If a company is found to be non-compliant, the following implications may occur:

·       A fine of up to 5% of worldwide turnover

·       Exclusion from public tenders

·       Impacts to Directors variable bonuses

There may be compensation for damages too as victims can bring forward civil liability claims.

In summary:

The CSDDD aims to improve corporate accountability of the ESG impacts e.g. the worsening climate crisis and human rights breaches, throughout supply chains and drive meaningful stakeholder engagement. Overall, the directive has been well received, with companies realising the commercial benefits of supply chain due diligence in addressing ESG impacts. Clear climate transition plans and transparent public disclosure are central tenets of the directive with financial penalties for failure to comply.