Understanding the CSDDD, the European corporate sustainability due diligence

The Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) is a European directive that introduces a duty of vigilance for companies operating within the European Union. The text, which has been discussed since 2021, was voted on by the European Parliament on April 24, 2024.

‍

What is the CSDDD?

‍

Concretely, the due diligence is the obligation for companies to prevent social, environmental, and governance risks related to their activities. This obligation applies to the entire value chain of the company and can also extend to the activities of subsidiaries and business partners, whether subcontractors or suppliers.

‍

The goal is to strengthen the responsibility, transparency, and sustainability of large European companies in terms of ESG (Environmental, Social, and Governance) in order to best preserve the environment, human rights, and the health and safety of people.

‍

However, not all companies are subject to these new obligations, and it is important to verify whether your company is concerned or not.

‍

Which companies are affected by the CSDDD?

‍

The directive applies to all sectors of activity, including regulated financial companies, except for the downstream part of their value chain.

‍

With regard to the application thresholds, the following companies are concerned:

‍

- Companies with ≥ 1000 employees

- AND with a turnover of ≥ 450M€ (worldwide turnover for European companies and turnover in the EU for non-European companies)

‍

A total of approximately 5500 companies in the EU are concerned by the CSDDD, or 0.05% of companies operating in the European Union.

‍

What is the implementation schedule for the CSDDD?

‍

The good news is that companies have a sufficient deadline to comply with the CSDDD! The implementation of the text will be progressive and will follow the following application schedule:

‍

- Companies with ≥ 5000 employees and turnover ≥ 1500 M€: text applicable in 2027

- Companies with ≥ 3000 employees and turnover ≥ 900 M€: text applicable in 2028

- Companies with ≥ 1000 employees and turnover ≥ 450 M€: text applicable in 2029

‍

What are the new obligations for companies?

‍

The CSDDD establishes a set of guidelines and obligations that companies must comply with, under penalty of sanctions. Concretely, companies subject to the CSDDD are subject to obligations of several types:

‍

Obligation of "due diligence"

‍

Companies must implement due diligence mechanisms to mitigate risks related to human rights, the environment, and governance associated with their activities.

‍

This means that they must:

‍

1. Identify and assess the impacts of their activities on the entire value chain in terms of the environment, human rights, and governance.

‍

This obligation applies to the entire value chain of the company, including upstream activities related to production and supply, as well as downstream activities related to distribution, transportation, etc.

‍

In the directive, the term "Adverse Impact" is used. It covers both:

- environmental impacts (environmental degradation, violation of individuals' rights to land and access to resources, etc.)

- impacts on human rights (violation of the right to life, torture, unfavorable working conditions, etc.)

- impacts related to the governance of the company (corruption, health and safety risks for employees, etc.).

‍

2. Prevent these negative impacts and identified risks by implementing due diligence mechanisms, including internal vigilance plans (procedures, policies, action plans, etc.) in terms of respect for the environment and human rights.

Companies must therefore implement a real vigilance plan (also known as a "transition plan").

‍

3. Develop strategies to mitigate greenhouse gas emissions and align the company's strategy with the objective of limiting global warming to 1.5°C as provided by the Paris Agreement.

However, to reduce GHG emissions, it is first necessary to know their extent by measuring them. It is necessary to carry out a carbon assessment of your company.

‍

Obligation of transparency

‍

Companies must be transparent about the impact of their activities.

‍

Concretely, they must publish all information related to the procedures and measures they have taken to comply with their obligations. This is an obligation of result, which obliges companies to publish a concrete transition plan to limit these negative impacts.

‍

Companies must also include their business partners in their approach and communicate transparently with stakeholders. When the directive refers to "Business partners," this covers both suppliers and subcontractors.

‍

In the sense of the directive, stakeholders refer to two types of entities:

- Direct business partners: with whom the company has a commercial agreement related to the operations, products, or services of the company or to whom the company provides services.

- Indirect business partners: who are not direct partners but who carry out commercial operations related to the operations, products, or services of the company.

‍

Principle of responsibility

‍

Through the application of the CSDDD, companies are held responsible for the ESG impacts resulting from their activities. This implies that companies must prevent and report on the impacts on human rights and the environment in their value chain, under penalty of seeing their responsibility engaged. Companies guilty of failing to meet their obligations may be prosecuted in court.

‍

However, with regard to the question of victim compensation, companies are not civilly liable for compensation for damages caused by their activities. In other words, the directive does not require the company to provide damages to persons affected by human rights violations or environmental damage. This question is left to the discretion of each Member State.

‍

How to best prepare for the CSDDD?

‍

If your company is concerned by the CSDDD, it is best to anticipate its implementation as soon as possible by asking yourself the following questions:

‍

- What are the risks generated by your company's activity in terms of the environment, fundamental rights, and governance?

- What mechanisms are already in place to manage these risks?

- Are there mechanisms to control the procedures you have put in place?

- How do you include your subcontractors and suppliers in this approach?

‍

The answers to these questions correspond to the information required under the CSDDD and answering them will save you valuable time when the time comes.

‍

What are the sanctions for non-compliance with the CSDDD?

‍

The CSDDD provides for several types of sanctions for companies that do not comply with the obligations provided for in the text:

‍

- The responsibility of companies may be engaged in the event of inaction or breaches of due diligence obligations. For companies guilty of infringements, a fine may be imposed, the amount of which may reach up to 5% of its worldwide net turnover.

- In the event of failure to deliver a "vigilance plan" also called a transition plan, the company may be forced to produce one.

‍

However, the question of the responsibility of managers has been removed from the latest version of the text and cannot be called into question. The same applies to the civil liability of companies, which is not provided for by the directive and is left to the discretion of the Member States.

‍

CSDDD vs CSRD: what are the differences?

‍

The CSDDD and the CSRD (Corporate Sustainability Reporting Directive) are different but complementary. Both directives relate to the environment, human rights, and governance of the company and pursue the same objective: to improve the ESG responsibility of large companies in order to achieve the climate objectives set by the European Green Deal.

‍

These two directives combined help to promote the achievement of these objectives even if they use different means and levers:

‍

- The CSRD improves and harmonizes ESG reporting at the European level. It is based on the obligation to produce a complete extra-financial report for the companies concerned.

- On the other hand, the CSDD does not imply an obligation to report but obliges the company to establish and publish mechanisms for identifying and managing environmental, social, and governance risks.

‍

In practice, if your company is concerned by both directives, you will have to respond to the obligations arising from each of these directives. The good news? If your company is subject to the CSRD, the climate transition plan required under the CSDDD can be the same as the one you provided under the CSRD!

‍

What are the limits of the CSDDD?

‍

The CSDDD has certain limitations:

‍

- A reduced scope of application and a risk-based approach removed: in the final text adopted, the companies concerned by the CSDDD are those with more than 1000 employees and 450 million euros in turnover, compared to 500 employees and 150 million euros in turnover in previous versions of the text.

‍

In addition, the very notion of "risk sector" and the list of several sectors considered "at risk" have been removed from the directive. This means that companies with a high risk of human rights and environmental violations on their value chain, whether in the textile, agri-food, or mining sectors, are subject to the same thresholds as other companies.

‍

Ultimately, about 70% of the companies initially concerned are now exempt, which significantly reduces the applicability of the CSDDD!

‍

- Limited consideration of the downstream value chain: it should be noted that the downstream value chain has been largely exempted by the directive.

‍

For example, the downstream value chain of the financial sector, corresponding in particular to "financial services," remains excluded from the scope of the directive. With regard to the "Due Diligence" procedure, all references to the financial sector have been removed from the text.

‍

However, a joint political declaration recognizes the need to develop this point further. To be continued...

‍

For other sectors, respect for the environment and human rights on the downstream value chain now only concerns direct business partners, thus excluding the activities of indirect business partners. The text does not cover the question of product elimination.

‍

- The impossibility of engaging the civil liability of companies: although a company may be found guilty and sanctioned, victims will not be able to obtain compensation or damages in the event of non-compliance with a company's due diligence obligations.

‍

However, this question of the civil liability of companies is left to the discretion of each Member State, which will decide whether or not to include it in its national transposition.

‍

Conclusion

‍

The European legislative arsenal is tightening in terms of the sustainability of companies. Complying with the CSDDD, but also with the CSRD, represents a real challenge for the companies concerned, as it requires time, money, and training on these subjects. To avoid being caught off guard, the objective is to anticipate as much as possible the application of these new texts by starting now to train and collect the necessary data.

‍

{{newsletter-blog-3}}

‍