The Corporate Sustainability Due Diligence Directive (CSDDD): A Key EU Initiative for Supply Chain Sustainability

The Corporate Sustainability Due Diligence Directive (CSDDD) is a significant regulatory initiative by the European Union (EU) aimed at addressing environmental and human rights risks in global supply chains. It was proposed by the European Commission as part of its “Just and sustainable economy” package in February 2022 and seeks to impose due diligence duties on companies concerning human rights and environmental impacts in their value chains. Here are key points about the CSDDD:

1. Due Diligence Duty: The CSDDD will require companies to integrate risk management and mitigation processes for human rights and environmental impacts into their value chains. This means that companies will need to assess, identify, and address potential risks related to these areas.
2. Director’s Responsibilities: Company directors, who are obligated to act in the best interest of the company, will have responsibilities for setting up and overseeing the implementation of due diligence processes. They will need to integrate due diligence into corporate strategy.
3. Transition Plans: The proposed directive will legally oblige EU corporations to develop transition plans. These plans will play a crucial role in helping companies align their operations with sustainability goals.
4. Complement to CSRD: The CSDDD will complement existing corporate disclosure rules in the EU, such as the Corporate Sustainability Reporting Directive (CSRD), which came into force in January 2023. While the CSRD focuses on reporting obligations, the CSDDD will emphasize the content of firms’ reporting, particularly regarding transition plans and broader obligations related to corporate governance.
5. Reporting on Transition Plans: The CSDDD may require companies with over 1,000 employees to publish detailed Paris-aligned transition plans. These plans should be compatible with limiting global warming to 1.5 degrees Celsius. Directors’ variable pay could be linked to the achievement of progress on these plans.
6. Impact on Institutional Investors: The directive may also impact institutional investors and asset managers. It could introduce an obligation for them to engage with investee companies to address adverse impacts caused by those companies on human rights and the environment. This could involve exercising voting rights to influence companies’ actions.
7. Key Points of Debate: The scope of the directive remains a major point of debate during “Trilogue” negotiations between EU institutions. While the European Council is in favor of generally excluding the financial services sector, the European Parliament insists on its inclusion. The issue of director’s duty of care, specifically regarding environmental and climate risks, is another area of discussion.
8. Timeline: Trilogue discussions are expected to conclude by the last quarter of 2023 or the first quarter of 2024. The next EU elections in June 2024 add urgency to reaching an agreement.
9. Global Implications: The CSDDD is a significant element of the EU’s regulatory framework for transitioning corporations to climate neutrality. Its impact extends beyond EU borders, as it will influence global supply chains and corporate behavior.
10. Pressure for Ambitious Implementation: Stakeholders emphasize the importance of not watering down the CSDDD to bridge divergent views. Full effectiveness of the directive requires targeting both companies and the financial sector. Pressure from the financial sector, particularly through engagement beyond voting rights, is crucial for encouraging companies to transition.

In summary, the Corporate Sustainability Due Diligence Directive is a key component of the EU’s efforts to promote sustainability and address climate and human rights risks in global supply chains. Its implementation will have far-reaching implications for companies, directors, institutional investors, and the broader global economy.