Decoding the EU directive on corporate responsibility and sustainability.

In the previous part of our series on corporate sustainability, we analyzed the Corporate Sustainability Reporting Directive (CSRD) and its impacts, the scope of the relationship, the obligations that companies must fulfill in its preparation and the current obligations that need to be complied with. In the second part, we will focus on the Corporate Sustainability Due Diligence Directive (CSDDD). This legislation is one of many steps aimed at raising awareness of the impact of business activities on the environment and human rights and promoting responsible and sustainable behavior of companies within supply chains.

On May 24, 2024, the Council of the European Union formally adopted the CSDDD. The directive entered into force on 3 July 2024, with member states having two years to transpose it into national law and inform the European Commission of the relevant texts. This legislation is a major step towards promoting sustainable and ethical practices between businesses based in the EU, as well as between these businesses and their partners from third countries. The CSDDD fits into the wider legislative framework of the European Union aimed at sustainability, which also includes the European Green Deal and the CSRD, and is in line with the United Nations' 2030 Agenda for Sustainable Development.

The CSDDD will be introduced gradually depending on the size and turnover of enterprises. The division into phases is as follows:

Phase 1: For EU companies with a worldwide net turnover of €1.5 billion or more and 5,000 employees, as well as for non-EU companies with the same turnover that have operated in the EU in the previous year, the implementation date will be the end of 2027.

Phase 2: For EU companies with a turnover of EUR 900 million or more and with more than 3,000 employees, and for non-EU companies with a turnover of EUR 900 million and existing in the EU, the implementation date is set at the end of 2028.

Phase 3: For EU companies with a turnover of EUR 450 million or more and with more than 1,000 employees and for external companies with the same parameters, the implementation date will be by the end of 2029.

Although micro and small and medium-sized enterprises (SMEs) are not indirectly subject to the CSDDD, they may be affected as trading partners within value chains and the legislation will provide them with support and protection.

The CSDDD aims to ensure that all companies operating on the European market contribute to the sustainable transformation of economies. Main duties include:

– Due diligence: Businesses must implement internal due diligence and take measures to prevent and mitigate negative impacts on human rights and the environment in their operations and within their supply chains.

– Transitional climate change mitigation plan: Successful companies are required to develop a climate change mitigation plan, which should be evaluated and updated annually.

- Notification mechanism: Companies must establish an accessible system for submitting information about potential negative impacts on individuals and organizations.

– Grievance Procedure: Organizations must ensure fair and transparent mechanisms for dealing with complaints from individuals who have been affected by illegal practices.

– Monitoring the effectiveness of policies: It is the duty of companies to monitor the effectiveness of their due diligence policies.

– Transparency requirements: Companies are expected to publicly disclose their sustainability practices and results.

CSDDD will introduce two enforcement mechanisms – administrative supervision and civil liability. National supervisory authorities will be responsible for ensuring compliance and will have the power to initiate investigations. In case of failure to comply with the obligations, companies can be sanctioned with fines that can reach up to 5 % of global turnover.

The CSDDD complements the existing CSRD directive. While CSRD focuses on transparency and accountability, CSDDD emphasizes adherence to strict environmental and human rights standards. Climate mitigation planning requirements are aligned with the CSRD, meaning companies don't have to worry about double reporting. (Co2AI)