Corporate Sustainability Due Diligence: A just and sustainable economy

A proposal for a new Corporate Sustainability Due Diligence

With over ¾ selecting it, the number one issue identified by the participants was the need for companies to take responsibility for their supply chains. Interestingly, respondents only gave a rating of 5.8/10 and 5.5/10 for “behaving responsibly in the communities they operate” and “taking responsibility when things go wrong” respectively. In the pursuit of re-examining such perceptions and provide an overview reflecting the most up to date reality, our group will be publishing the 2nd edition of our report on 19 October.

In the beginning of 2022, the European Commission published its long-awaited proposal for a directive on Corporate Sustainability Due Diligence (CSDDD) with the general aim of motivating companies to inspect their supply chains for human rights and environmental breaches. It clearly presents a shift in the way the business of certain companies is conducted and is the first time such a scheme is proposed at the level of the European Union.

The provisions within the proposal apply to the company’s own operations, their subsidiaries and their value chains (direct and indirect established business relationships). Companies within scope will need to take appropriate measures in light of the severity and likelihood of different impacts, the measures available to the company in the specific circumstances, and the need to set priorities.

The proposed CSDDD, at its core, aims to prevent and deal with “adverse” environmental and human rights impacts in a harmonized legal EU framework to move towards a just and sustainable economy. A union wide legislation has been demanded by nearly all stakeholders voicing discontent with disparate national approaches and/or underlining the need to prescribe mandatory actions throughout the value chain. Understanding the proposed legislation necessarily requires appreciating that an “adverse” impact is one resulting from the violation of one of the prohibitions, rights (e.g., the right to organize and collective bargaining) or obligations related to a list of international conventions. The composition of this list has already proven to be a point of discussion within the European Parliament who are widely expected to expand upon it.

European Commission Proposal: the key points

What are the points in the proposal which are key to keep in mind within a global context?

1. The directive is applicable to non-EU companies which fulfill one of the following conditions: (a) Generated a net turnover of EUR 150 million within the union in the financial year preceding the last financial year or (b) generated a net turnover of EUR 40 million but not more than EUR 150 million in the union in the financial year preceding the last financial year, provided that at least 50% of its net worldwide turnover was generated in one or more of the listed sectors (e.g., Manufacture of textiles or extraction of mineral resources). EU based companies, on the other hand, will fall within the scope if they have over 500 employees on average and a net worldwide turnover of EUR 150 million in the last financial year (lower criteria are applied for those operating in the aforementioned sectors)
2. All companies within scope will, inter alia, have to take concrete steps to integrate due diligence into policies (incl. through establishing a code of conduct to be followed by employees and suppliers), identify, prevent or mitigate potential impacts and bringing an end or minimize actual impacts. In addition, companies will have to establish a complaints procedure, monitor the effectiveness of measures and publicly communicate on due diligence (see a previous article on the Corporate Sustainability Reporting Directive).
3. The directors of non-EU companies meeting the threshold of EUR 150 million within the EU will have to adopt a plan to ensure that the business model and strategy is compatible with the ambition of limiting global warming to 1.5 degrees. What’s more, companies should take into account the fulfillment of this plan when deciding variable remuneration if this is linked to the contribution of a director to the business strategy of a company and long-term interest. This point has in particular proven to be one with highly divergent opinions with discussions in the Council (Member States) looking favourably towards deleting the relevant articles while the European Parliament is more positive towards integrating these type of duties.
4. The extent of the due diligence is limited to established business relationships which is, shortly put, understood to be a direct or indirect, business relationship which is or is expected to be lasting. A company will not be held liable for damages if they receive contractual assurances from a direct partner with whom they have this type of relationship. This point has proven to be one with highly divergent opinions with discussions in the Council (Member States) looking favourably towards removing the focus on directors while the European Parliament has shown itself to be more positive towards keeping them within the directive.

The process towards an agreement on a CSDDD while far from complete, has started with both the European Parliament and the Council (Member States) engaging in internal negotiations. It is not yet possible to predict the details of the final legislative text but considering the proposed scope and the economic prowess of the European Union one can assume that the future law will have ripple effects beyond its borders. Our report confirms that there is a clear demand for companies to take responsibility over their supply chains. It is now not a question of “if” concrete responsibility on due diligence will be legally mandated but “when” and “how” this will materialize in practice.