Corporate Sustainability Due Diligence Directive (CSDDD)  | Part 1

On April 24th, 2024, the European Parliament formally adopted the Corporate Sustainability Due Diligence Directive (CSDDD), setting into law obligations for large companies with significant activities in the EU to conduct human rights and environmental due diligence in their own operations and across their chains of activities. This article explores the main obligations and key requirements imposed on businesses by the CSDDD.

Background

The adoption of the CSDDD is a significant step in mandating companies to embed responsible business conduct into due diligence policies and procedures. After several years of legislative developments on due diligence regulation at the national level, the CSDDD seeks to harmonise due diligence requirements across EU Member States and to level the playing field for companies active in the EU market. It sets minimum requirements for what EU Member States are required to transpose into national law. At a minimum, this will mean they need to develop or update existing national laws to meet the CSDDD’s objectives and scope but are allowed to go further by setting stricter due diligence requirements or by including into scope activities currently excluded from the Directive.

Key Requirements and Obligations

Requirements of the CSDDD

The CSDDD sets minimum requirements on companies to develop and implement appropriate measures to conduct due diligence, such that companies can effectively identify and address adverse human rights and environmental impacts. These steps include seven significant obligations set out in Articles within the Directive:

1.       Article 5 delineates critical obligations for companies to incorporate robust due diligence practices within their corporate policies. Companies are required to develop a due diligence policy that includes comprehensive risk assessment procedures aimed at identifying, preventing, and mitigating adverse human rights and environmental impacts within their operations, subsidiaries, and value chains.

Key provisions mandate:

• The regular implementation and updating of these due diligence measures, ongoing monitoring of their effectiveness, and transparent public reporting on due diligence activities and their outcomes.
• Companies must establish mechanisms for stakeholder engagement and accessible grievance procedures.

Compliance with Article 5 is essential for promoting responsible business conduct and achieving sustainability goals, ensuring companies address potential risks and impacts comprehensively and systematically.

2.       Article 6 outlines essential obligations for companies to identify actual and potential adverse human rights and environmental impacts. Companies must conduct thorough due diligence across their operations, subsidiaries and value chains to identify these risks.

Key provisions require:

• Developing and implementing procedures to assess the context of their operations and the severity of potential impacts.
• Engaging with stakeholders, including affected communities and workers, to gather relevant information.
• Regularly updating the risk assessments to reflect changes in their business activities or external environment.
• Integrating findings from risk assessments into company policies and strategies.

By adhering to Article 6, companies ensure systematic identification and assessment of risks, fostering proactive measures to address and mitigate adverse impacts comprehensively.

3.       Articles 7 and 8 establish key obligations for companies to prevent and mitigate identified adverse human rights and environmental impacts. Article 7 mandates that companies must develop and implement preventive measures, such as:

• Integrating due diligence findings into corporate policies.
• Establishing and enforcing contractual clauses with business partners.
• Supporting SMEs in implementing due diligence measures.

Article 8 requires companies to take corrective action when adverse impacts occur.

Key provisions include:

• Developing and executing remediation plans.
• Engaging with affected stakeholders to address grievances.
• Collaborating with relevant authorities to ensure compliance.

By fulfilling these obligations, companies can effectively prevent, mitigate and remedy adverse impacts, thereby enhancing their sustainability practices and promoting responsible business conduct throughout their value chains.

4.       Article 9 outlines essential obligations for companies to establish and maintain a complaints procedure. Companies are required to create accessible and transparent mechanisms for individuals and organisations to submit complaints regarding potential or actual adverse human rights and environmental impacts.

Key provisions include:

• Ensuring the complaints procedure is accessible to all stakeholders, including workers, communities and other affected parties.
• Providing clear and transparent processes for receiving, investigating and addressing complaints.
• Ensuring confidentiality and protection against retaliation for complainants.
• Regularly reviewing and improving the effectiveness of the complaints mechanism.

By adhering to Article 9, companies ensure that grievances are systematically addressed, fostering trust and accountability in their operations and enhancing their overall sustainability and ethical practices.

5.       Article 10 sets out crucial obligations for companies to monitor the effectiveness of their due diligence measures.

Key provisions include:

• Establishing and maintaining a system to track the implementation and outcomes of due diligence policies and procedures.
• Conducting periodic assessments to evaluate the effectiveness of their measures in preventing, mitigating and addressing adverse human rights and environmental impacts.
• Involving stakeholders, including affected communities and workers, in the monitoring process to gather diverse perspectives and feedback.
• Regularly updating and adapting due diligence measures based on monitoring results and emerging risks.

By complying with Article 10, companies ensure continuous improvement in their due diligence practices, fostering transparency, accountability, and responsiveness to evolving human rights and environmental challenges.

6.       Article 11 outlines key obligations for companies to publicly communicate their due diligence efforts. Main provisions require companies to:

• Regularly publish detailed reports on their due diligence policies and measures.
• Include information on identified risks, actions taken to address them, and the effectiveness of these actions.
• Ensure transparency by making these reports easily accessible to stakeholders, including investors, customers, and affected communities.
• Adhere to standardised reporting frameworks to enhance comparability and consistency.

By fulfilling these obligations, companies demonstrate accountability and transparency in their sustainability practices. Article 11 ensures stakeholders are informed about a company’s efforts to manage human rights and environmental risks, thereby fostering trust and enabling informed decision-making.

7.       Article 15 imposes significant obligations on companies regarding due diligence in sustainability matters. The primary obligations encompass conducting risk assessments, implementing risk management measures, and monitoring the effectiveness of these measures.

Key provisions include:

• The requirement to identify and prioritise sustainability risks throughout the supply chain, engage with stakeholders, and take corrective actions when necessary.
• Companies are mandated to disclose relevant information concerning their due diligence processes publicly.
• An emphasis on the importance of collaboration among companies, industry associations and relevant stakeholders to address sustainability challenges effectively.

By adhering to these obligations and provisions, companies can mitigate adverse impacts on the environment, human rights, and other social factors, thereby fostering sustainable business practices and contributing to societal well-being.

Part 2 of this article will explore the outworking of the Directive, including an understanding of its scope and the timings of its implementation. Initial ideas on how to practically develop appropriate strategies will also be part of the article.