The European Union has taken a monumental step in its commitment to sustainable and ethical business operations with the formal adoption of the Corporate Sustainability Due Diligence Directive (CSDDD) by the European Parliament on April 24, 2024. This directive, part of the EU’s broader agenda to foster a sustainable economy, imposes new requirements on large companies to ensure responsible corporate behavior across their operations and supply chains.
Historical context and legislative journey
The CSDDD proposal was first tabled by the European Commission on February 23, 2022, aiming to promote human rights and environmental standards while leveling the playing field for businesses within the EU. Following intense political and technical discussions, the legislative process saw multiple revisions and negotiations, often referred to as "trilogues," among the European Commission, the European Parliament, and the Council.
These discussions culminated in a compromise text in December 2023, which was tweaked further to garner the necessary majority from EU Member States. The Council formally endorsed this version in March 2024, paving the way for its adoption before the June elections.
Scope and applicability
The directive targets large companies with significant activities in the EU. Initially proposed thresholds were adjusted to lessen the burden on smaller businesses, settling on entities with over 1,000 employees and a net worldwide turnover exceeding EUR 450 million. Additionally, non-EU companies with similar turnover within the EU are also subjected to these regulations, ensuring that the directive has a wide-reaching impact on multinational corporations operating across the region.
Core obligations
Under the CSDDD, in-scope companies are required to:
Conduct due diligence on their operations and those of their subsidiaries and supply chain partners to identify, prevent, mitigate, and account for human rights and environmental impacts.
Develop and implement transition plans for climate change mitigation in alignment with the Paris Agreement goals.
This includes not only direct operations but also extensive supply chain oversight, pushing companies to take responsibility for their entire operational footprint.
Enforcement mechanisms
To enforce these obligations, the EU will utilize both public and private enforcement strategies. National authorities will be tasked with overseeing compliance, equipped with the power to impose significant penalties for non-compliance. Furthermore, companies can be held civilly liable for harm caused by failing to meet their due diligence obligations, providing a clear legal avenue for affected individuals or groups to claim damages.
Implications for businesses
The adoption of the CSDDD represents a significant shift in how businesses must operate within the EU. Companies will need to integrate comprehensive sustainability practices into their core operations and management strategies, impacting everything from procurement to product design. The directive also poses challenges in terms of reporting and compliance, requiring robust systems to track and verify adherence to the new standards.
Future directions and international impact
As the directive sets a new standard for corporate responsibility in Europe, it may also influence global practices, encouraging other regions to adopt similar measures. The EU has positioned itself as a leader in regulatory efforts to promote sustainability and ethical business practices, potentially catalyzing a global movement towards more stringent corporate governance in terms of social and environmental responsibility.
Conclusion
The Corporate Sustainability Due Diligence Directive marks a significant milestone in the EU's regulatory landscape, reflecting its commitment to leading the charge on global sustainability and ethical business practices. As companies begin to adjust to these new requirements, the impacts of this directive will likely reverberate through global markets, prompting a worldwide reevaluation of corporate responsibilities towards people and the planet.
