Published June 13, 2024 by McAlan LC
Author: Allen Campbell, JD, MBA, Founder & Chief Executive Officer, McAlan LC
We‘ve always known this would be The Big One, and now it’s becoming reality. The CSDDD has passed the legislative hurdles. It now awaits only publication in the Official Journal of the European Union, 20 days after which it will enter into force. Member States will then have two years to transpose the Directive into national law and communicate the relevant texts to the Commission. One year later, the rules will start to apply to companies, with a gradual phase-in between three and five years after entry into force. The European Commission will issue a set of guidelines to help companies comply with the Directive.
In the words of the Commission,
“The aim of this Directive is to foster sustainable and responsible corporate behavior in companies’ operations and across their global value chains. The new rules will ensure that companies in scope identify and address adverse human rights and environmental impacts of their actions inside and outside Europe.”
Overview: This is a massive legal instrument. As stated by the Commission, here are the key aspects of the Directive:
The benefits of the new rules:
For citizens:
- More protection of human rights, notably including labor rights.
- A healthier environment to live in.
- Increased trust in businesses.
- More transparency, thus enabling informed choices.
- Better access to justice for victims.
For companies:
- Harmonized legal framework in the EU – a level playing field for companies to compete.
- Greater customer trust and employees’ commitment.
- Better awareness of companies’ negative human rights and environmental impacts, less liability risks.
- Better risk management, more resilience and increased competitiveness.
- Increased attractiveness for talent, sustainability-oriented investors and public procurers.
- Increased incentives for innovation.
- Improved access to financial resources.
For developing countries:
- Better protection of human rights and the environment.
- Sustainable investment, capacity building and support for value chain companies.
- Improved sustainability-related practices.
- Increased adoption of international standards.
- Improved living conditions for people.
Company obligations:
- “Corporate due diligence duty”: The main elements of this duty are identifying and addressing potential and actual adverse human rights and environmental impacts in a company’s own operations, in its subsidiaries, and, where related to their value chains, those of its their business partners.
- Climate change-related obligations: Large companies must adopt a transition plan for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement as well as intermediate targets under the European Climate Law.
Which companies are in-scope:
- Large EU companies: Legal obligations are imposed on about 6,000 companies with over 1000 employees and over EUR 450 million turnover (net) worldwide.
- Large non–EU companies: Obligations are also imposed on about 900 companies with over EUR 450 million turnover (net) in the EU.
- Small and medium size enterprises: Micro companies and SMEs are not directly covered by the proposed rules. They will however be massively affected indirectly by virtue of being in the supply chains of in-scope companies. The Directive does provide some support and protection for them.
Estimated compliance costs:
Businesses will have to bear:
- The costs of establishing and operating due diligence procedures.
- Transition costs, including expenditures and investments to adapt a company’s own operations and value chains to comply with the due diligence obligation, if needed.
Enforcement:
The rules will be enforced through:
- Administrative supervision: Each Member State will designate an authority to supervise and enforce the rules, by means of injunctive orders and effective, proportionate and dissuasive penalties (notably fines). At the EU level, the Commission will set up a European Network of Supervisory Authorities that will bring together representatives of the national bodies to ensure a coordinated approach.
- Civil liability: Member States will ensure that victims get compensation for damages resulting from an intentional or negligent failure to carry out due diligence.
The Political Context:
Sustainability is often understood to be the same thing as ESG (the environmental, social and governance factors of a business). In less than about 30 years, sustainability/ESG has become a dynamic new force in the global business ecosystem. The CSDDD is in the tradition of ESG, but it is only focused on the “E” and “S”, and does not deal with the “G”. (The G component was in the first version of the CSDDD,
the Mandatory Due Diligence [MDD] Directive.) Does this mean, as many people have argued, that the G component is less important than the E and S components? Does it suggest that the G component will gradually run out of gas? Time will tell.
The CSDDD is on the cutting edge of sustainability. Europe has been the leader in sustainability regulation. The CSDDD is a truly progressive law, and it was the recipient of hard political bargaining. The European Commission finally adopted it on May 24th. As stated above, it mandates behaviors. It follows and is in the tradition of the recently enacted EU Corporate Sustainability Reporting Directive, which mandates reporting. Mandating reporting and behaviors can be seen as a one-two punch.
A few days ago, only weeks after the Commission acted, elections were held throughout Europe, and the results showed significant gains for hard-right and right- leaning parties. Only time will tell whether the changing political winds in Europe – or elsewhere – will impact this due diligence legal initiative.
In the meantime, here in the US, the State of California is quite progressive with respect to sustainability and has enacted three laws within the last twelve months. Like the EU’s laws, the California laws have major effects on companies that are not domiciled there.
Recommendations:
For more than two years we have been urging companies to pay attention to this legislation, to consider its ramifications for operations and supply chains, to begin re- thinking their business models and practices, and to gear up accordingly. More than ever, that is excellent advice.
Remember too that there will be opportunities for forward-thinking companies.
In effect, over the next few years, all sizable companies will find themselves affected by what I call Value Chain Sustainability laws. They will impact the global trading system. It seems likely that some collaboration will be necessary. We recommend that companies explore possible collaborative responses, possibly in cooperation with the EU and its Member States.
Previously published at https://mcalan.com/the-european-union-corporate-sustainability-due-diligence-directive/. All rights reserved by author.
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