Corporate Sustainability Due Diligence Directive (CSDDD): Published Directive

Alessandro Micagni

On July 8th, 2024

On July 5, 2024, the EU published Directive (EU) 2024/1760, the Corporate Sustainability Due Diligence Directive (CSDDD). Effective July 25, 2024, it enforces corporate responsibility for human rights and environmental impacts.

Corporate Sustainability Due Diligence Directive (CSDDD): Published Directive

On July 5, 2024, the Official Journal of the European Union (OJ) published Directive (EU) 2024/1760, widely known as the Corporate Sustainability Due Diligence Directive (CSDDD). This directive, dated June 13, 2024, signifies a groundbreaking regulatory framework designed to enforce corporate responsibility and enhance sustainability practices across the European Union (EU). The CSDDD amends Directive (EU) 2019/1937 and Regulation (EU) 2023/2859, highlighting the EU’s unwavering commitment to fostering sustainable and ethical business conduct.

The Corporate Sustainability Due Diligence Directive (CSDDD) aims to address and mitigate adverse human rights and environmental impacts within corporate operations and supply chains. By establishing rigorous due diligence obligations, the directive seeks to promote transparency, accountability, and long-term sustainability in corporate governance.

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CSDDD: Implementation Timeline

The CSDDD officially entered into force on July 25, 2024, exactly twenty days following its publication in the Official Journal of the EU. This directive sets forth a structured timeline for Member States and businesses to comply with its comprehensive requirements:

By July 26, 2026: Member States are mandated to adopt and publish the necessary laws, regulations, and administrative provisions to align with the directive. This step ensures that national legal frameworks are updated to support the directive's objectives and enforceability.
Phased Application: The directive's provisions will be applied in phases to accommodate the varying capacities and scales of companies. The phased approach allows for a gradual yet systematic implementation, ensuring that businesses have sufficient time to adapt their operations and policies.
Full Implementation by July 26, 2027: The directive expects full compliance from all targeted companies by this date. The staggered application timeline is designed to account for the size and turnover of the companies involved, with larger enterprises expected to comply sooner than smaller entities.

Objectives of the CSDDD

The primary objective of the Corporate Sustainability Due Diligence Directive (CSDDD) is to ensure that companies operating within the European Union (EU) rigorously identify, prevent, mitigate, and account for adverse human rights and environmental impacts throughout their operations and value chains. This comprehensive approach aims to foster sustainable and responsible business conduct, enhancing corporate governance and accountability.

The CSDDD seeks to integrate sustainability into the core business strategies of companies, making them accountable for their entire supply chain. This includes ensuring that human rights are respected, environmental standards are upheld, and adverse impacts are addressed proactively. By embedding these responsibilities into corporate policies, the directive promotes long-term sustainability and ethical business practices.

Corporate Sustainability Due Diligence Directive (CSDDD): Scope and Applicability

The Corporate Sustainability Due Diligence Directive (CSDDD) is meticulously designed to apply to a broad spectrum of companies within the EU, focusing primarily on large enterprises and specific medium-sized companies operating in high-risk sectors. The directive delineates its scope as follows:

Large Companies: The directive applies to enterprises with more than 500 employees and a net turnover exceeding EUR 150 million. These large companies are seen as pivotal in leading the shift towards sustainable practices due to their significant impact on the market and supply chains.
Medium-Sized Companies in High-Risk Sectors: Medium-sized enterprises with over 250 employees and a net turnover above EUR 40 million are also subject to the directive, particularly if they operate in high-risk sectors. These sectors include textiles, agriculture, and minerals, where the risk of adverse human rights and environmental impacts is notably higher.

Detailed Provisions and Requirements

1. Integration into Policies: Companies must integrate due diligence into their corporate policies, ensuring that these policies are aligned with the directive's objectives. This involves developing and implementing a due diligence strategy that includes identifying, preventing, mitigating, and accounting for adverse impacts.

2. Identification of Adverse Impacts: Companies are required to conduct comprehensive assessments to identify potential and actual adverse impacts on human rights and the environment. This includes mapping the entire supply chain and engaging with stakeholders to gather relevant information.

3. Preventive Measures: Upon identifying risks, companies must implement measures to prevent adverse impacts. These measures should be proportionate to the severity and likelihood of the impacts and may include revising operational procedures and improving supply chain management practices.

4. Ceasing and Minimizing Impacts: In instances where adverse impacts occur, companies are obligated to take appropriate actions to cease or minimize these impacts. This involves continuous monitoring and adapting business practices to address and mitigate the impacts effectively.

5. Remediation: Companies that have caused or contributed to adverse impacts must provide remediation. This can include compensation, restoration, or other suitable remedial actions. Establishing grievance mechanisms is also required to address complaints from affected parties and ensure access to remedies.

6. Monitoring and Reporting: Regular assessments and public reporting are mandatory to monitor the effectiveness of due diligence measures. Companies must publicly report on their due diligence activities through annual statements, ensuring transparency and accountability.

7. Stakeholder Engagement: Engaging with stakeholders is crucial for effective due diligence. Companies must provide comprehensive information and conduct transparent consultations at various stages of the due diligence process to ensure that the interests and concerns of affected parties are considered.

8. Supervision and Penalties: Member States are responsible for designating supervisory authorities to monitor compliance with the directive. These authorities have the power to conduct investigations and impose sanctions, ensuring that companies adhere to their due diligence obligations. Non-compliance can result in substantial fines based on the company’s net worldwide turnover.

High-Risk Sectors

The directive specifically targets high-risk sectors due to their propensity for adverse human rights and environmental impacts. These sectors include:

Textiles: The textile industry often involves complex supply chains with significant risks related to labor rights, including child labor and poor working conditions.
Agriculture: Agricultural practices can have substantial environmental impacts, such as deforestation, water use, and pesticide use, alongside issues related to labor rights.
Minerals: The extraction and processing of minerals pose serious environmental and human rights challenges, including habitat destruction and exploitation of workers.

Detailed Provisions of the CSDDD

The Corporate Sustainability Due Diligence Directive (CSDDD) represents a significant advancement in the EU's regulatory framework, aimed at promoting sustainable and responsible business practices. This directive introduces rigorous due diligence obligations for companies to address and mitigate adverse human rights and environmental impacts within their operations and value chains.

CSDDD Article 1: Subject Matter and Scope

Article 1 of the Corporate Sustainability Due Diligence Directive (CSDDD) provides a comprehensive overview of the directive's primary objectives and its scope of application. The central focus of this article is on the mandatory requirement for companies to engage in due diligence processes that aim to prevent, identify, and mitigate adverse human rights and environmental impacts. By enforcing these obligations, the directive seeks to enhance corporate governance and accountability across the EU, ensuring that businesses contribute positively to sustainable development.

Key components of Article 1 include:

Mandate for Due Diligence: The article stipulates that companies must implement thorough due diligence procedures to address potential and actual adverse impacts. This involves a proactive approach to identifying risks and taking appropriate measures to mitigate them.
Enhancing Corporate Governance: By embedding due diligence into corporate policies, the directive aims to foster a culture of accountability and transparency within businesses. This, in turn, supports the broader goal of sustainable development.
Scope of Application: Article 1 delineates the types of companies that fall within the scope of the directive, emphasizing large enterprises and medium-sized companies in high-risk sectors. This targeted approach ensures that the entities with the most significant impact on human rights and the environment are held accountable.

Article 2: Definitions

Article 2 of the CSDDD is critical as it provides detailed definitions of the key terms used throughout the directive. Clear and precise definitions are essential to ensure uniform understanding and consistent implementation across Member States. Some of the crucial definitions included in this article are:

Adverse Impact: This term refers to any negative effect on human rights or the environment that may arise from a company’s operations, its subsidiaries, or its value chains. Understanding what constitutes an adverse impact is fundamental for companies to identify and address such issues effectively.
Due Diligence: Defined as the process through which companies must identify, prevent, mitigate, and account for adverse impacts. This involves continuous assessment and improvement of corporate policies and practices to align with the directive's objectives.
Subsidiaries: The directive specifies that due diligence obligations extend to a company's subsidiaries, ensuring that parent companies are accountable for the actions of their entire corporate group.
Value Chains: This term encompasses all the activities and entities involved in producing a product or service, from raw material sourcing to the end consumer. By including the entire value chain, the directive ensures comprehensive coverage of potential impacts.

The detailed provisions outlined in Articles 1 and 2 are designed to ensure that companies adopt a systematic and structured approach to due diligence. The emphasis on precise definitions and comprehensive scope underscores the EU's commitment to creating a robust regulatory environment for corporate sustainability.

Systematic Due Diligence: Companies are required to establish and maintain effective due diligence processes that are integrated into their corporate policies and risk management systems. This systematic approach ensures that due diligence is not a one-time activity but an ongoing commitment.
Stakeholder Engagement: The definitions and scope of the directive highlight the importance of engaging with stakeholders throughout the due diligence process. This includes not only internal stakeholders like employees but also external ones such as suppliers, customers, and affected communities.
Legal Clarity: By providing clear definitions, the directive reduces the risk of legal ambiguities and inconsistencies in its application across different Member States. This clarity helps companies understand their obligations and the expected standards of conduct.
Broad Coverage: The inclusion of the entire value chain in the due diligence obligations means that companies must consider the impacts of their operations from start to finish. This comprehensive approach ensures that no part of the production process is overlooked.

Article 3: Integration of Due Diligence into Policies

The Corporate Sustainability Due Diligence Directive (CSDDD) mandates that companies integrate due diligence into their corporate policies and management systems. This requirement is pivotal in embedding sustainability and ethical practices into the core operations of businesses.

Adoption of a Due Diligence Policy: Companies must develop and adopt a comprehensive due diligence policy. This policy should outline the company's approach to identifying, preventing, mitigating, and accounting for adverse human rights and environmental impacts.
Public Availability and Regular Updates: The due diligence policy must be publicly available, ensuring transparency and accountability. Additionally, companies are required to regularly update the policy to reflect any changes in their operations, risk assessments, or regulatory requirements.
Stakeholder Engagement: The development of the due diligence policy should involve consultations with stakeholders, including employees, suppliers, and affected communities. This engagement ensures that the policy addresses relevant concerns and reflects a broad range of perspectives.
Integration into Corporate Governance: The policy must be integrated into the company’s broader governance framework, ensuring that due diligence considerations are incorporated into decision-making processes at all levels.

Article 4: Identifying Adverse Impacts

Article 4 of the CSDDD focuses on the crucial step of identifying potential and actual adverse impacts on human rights and the environment. This requirement ensures that companies are aware of the risks associated with their operations and supply chains.

Thorough Assessments: Companies must conduct detailed assessments to identify adverse impacts. These assessments should cover all aspects of the company’s operations, including its subsidiaries and value chains.
Supply Chain Mapping: Companies are required to map their entire supply chain to identify areas where adverse impacts are likely to occur. This mapping process helps in understanding the complexities and vulnerabilities within the supply chain.
Stakeholder Engagement: Engaging with stakeholders is essential to gather relevant information and insights. This includes consulting with workers, local communities, and other affected parties to understand the potential impacts of the company’s operations.
Use of Data and Tools: Companies should use both quantitative and qualitative data, as well as various assessment tools, to identify adverse impacts. This might include environmental impact assessments, human rights impact assessments, and other relevant methodologies.

Article 5: Corporate Sustainability Due Diligence Directive Preventive Measures

Article 5 of the CSDDD mandates that companies implement measures aimed at preventing identified adverse impacts. This proactive approach is crucial for mitigating risks and ensuring sustainable business practices.

Development of Action Plans: Companies must develop comprehensive action plans that outline specific measures to prevent adverse impacts. These plans should include clear objectives, timelines, and responsibilities.
Proportional Measures: The preventive measures should be proportionate to the severity and likelihood of the identified impacts. Companies must prioritize actions based on the most significant risks.
Regular Monitoring and Adjustment: Preventive measures should be regularly monitored to assess their effectiveness. Companies must be prepared to adjust their strategies based on monitoring results and changing circumstances.
Capacity Building: Companies should invest in capacity building, both internally and within their supply chains, to enhance the ability to prevent adverse impacts. This includes training programs, awareness campaigns, and support for suppliers.

By emphasizing preventive measures, Article 5 ensures that companies adopt a proactive stance towards sustainability, addressing potential issues before they escalate.

CSDDD Article 6: Ceasing and Minimising Impacts

Article 6 of the Corporate Sustainability Due Diligence Directive (CSDDD) mandates that companies must take decisive actions to cease or minimize adverse human rights and environmental impacts once they have been identified. This requirement underscores the directive’s commitment to proactive and responsible business practices.

Operational Revisions: Companies are required to revise their operational procedures to address identified impacts. This may involve altering production processes, changing supplier practices, and implementing new technologies that reduce harmful effects.
Supply Chain Improvements: Enhancing supply chain practices is critical. Companies must ensure that their suppliers and partners adhere to sustainable and ethical standards. This includes conducting regular audits, providing training, and setting clear expectations for compliance.
Stakeholder Engagement: Continuous engagement with stakeholders is essential for ensuring that measures to cease or minimise impacts are effective. Companies must communicate with affected communities, employees, and other relevant parties to gather feedback and improve their strategies.
Prioritisation of Actions: Companies must prioritize actions based on the severity and likelihood of the impacts. This ensures that the most critical issues are addressed promptly and effectively, minimising the potential harm to human rights and the environment.

Article 7: Remediation of Adverse Impacts of CSDDD

Article 7 of the CSDDD sets forth the requirements for companies to provide remediation when they have caused or contributed to adverse human rights or environmental impacts. This provision ensures that companies are held accountable and that affected parties receive adequate redress.

Compensation and Restoration: Companies must offer compensation to affected individuals and communities. This may include financial restitution, health care services, or other forms of support to restore the well-being of those impacted.
Other Remedial Actions: Beyond compensation, companies are required to take other remedial actions that may include environmental restoration, rebuilding damaged infrastructure, and implementing preventive measures to avoid recurrence.
Establishment of Grievance Mechanisms: Companies must establish accessible and transparent grievance mechanisms. These mechanisms should allow stakeholders to report issues, seek remedies, and ensure that their complaints are addressed in a timely and fair manner.
Collaboration with Stakeholders: Effective remediation often requires collaboration with stakeholders, including NGOs, local authorities, and affected communities. This collaboration ensures that remediation efforts are comprehensive and considerate of the needs and rights of those impacted.

Article 8: CSDDD Monitoring

Article 8 of the CSDDD focuses on the continuous monitoring of due diligence measures to ensure their effectiveness and alignment with the directive’s objectives. Regular monitoring is crucial for identifying areas of improvement and ensuring sustained compliance.

Periodic Assessments: Companies are required to conduct periodic assessments of their due diligence measures. These assessments must be thorough and based on both qualitative and quantitative indicators to provide a comprehensive evaluation of the effectiveness of the measures.
Annual Reviews: At a minimum, companies must conduct these assessments annually. However, additional assessments are necessary whenever significant changes occur in the company’s operations, supply chains, or external environment.
Use of Indicators: The assessments should utilize a variety of indicators to measure performance. These can include metrics related to human rights impacts, environmental footprints, stakeholder feedback, and compliance with internal policies and external regulations.
Reporting and Transparency: Companies must report the findings of their assessments publicly. This transparency ensures accountability and allows stakeholders to evaluate the company’s commitment to sustainability and responsible business practices.

Article 9: Corporate Sustainability Due Diligence Directive Public Communication

Article 9 of the Corporate Sustainability Due Diligence Directive (CSDDD) mandates that companies must publicly report on their due diligence activities through an annual statement published on their website. This requirement is fundamental in promoting transparency and accountability in corporate sustainability practices, allowing stakeholders to assess the company’s performance and commitment to ethical operations.

Annual Statement: Companies are required to prepare a comprehensive annual statement detailing their due diligence activities. This statement must include information on the policies and measures implemented, the identified adverse impacts, and the actions taken to address these impacts.
Content of the Statement: The annual statement should cover the entire due diligence process, including risk assessments, preventive measures, mitigation efforts, and remediation actions. It should also highlight any changes or improvements made to the company’s policies and procedures.
Accessibility: The statement must be easily accessible on the company’s website, ensuring that stakeholders, including investors, customers, employees, and affected communities, can readily review the information. This transparency is crucial for building trust and demonstrating the company’s commitment to sustainability.
Verification and Assurance: Companies are encouraged to seek external verification or assurance of their statements to enhance credibility and reliability. Independent audits or third-party assessments can provide additional confidence to stakeholders regarding the accuracy and completeness of the reported information.

Article 10: Model Contractual Clauses and Guidelines

Article 10 of the CSDDD requires the European Commission, in consultation with Member States, to adopt guidance on voluntary model contractual clauses by January 26, 2027. These guidelines are intended to assist companies in complying with the due diligence requirements and to promote uniform practices across the EU.

Development of Model Clauses: The Commission will develop and disseminate model contractual clauses that companies can voluntarily adopt. These clauses are designed to facilitate compliance with the directive by providing standardized language and requirements for contracts with suppliers and business partners.
Content of the Clauses: The model clauses will cover various aspects of due diligence, including obligations to identify and mitigate adverse impacts, requirements for monitoring and reporting, and provisions for remediation and stakeholder engagement.
Consultation and Collaboration: The development of these model clauses will involve extensive consultation with Member States, businesses, civil society organizations, and other relevant stakeholders. This collaborative approach ensures that the clauses are practical, effective, and widely accepted.
Promotion of Uniform Practices: By providing standardized contractual language, the model clauses help to ensure consistency and uniformity in the application of due diligence requirements across different sectors and Member States. This reduces the burden on companies and facilitates compliance.

CSDDD Article 11: Stakeholder Engagement

Article 11 of the CSDDD emphasises the importance of meaningful stakeholder engagement throughout the due diligence process. Effective engagement ensures that the interests and concerns of affected parties are considered, enhancing the legitimacy and effectiveness of the company’s sustainability efforts.

Comprehensive Information: Companies must provide comprehensive and accessible information to stakeholders regarding their due diligence activities. This includes details about identified risks, preventive measures, and remediation actions.
Transparent Consultations: Companies are required to conduct transparent consultations with stakeholders at various stages of the due diligence process. These consultations should involve a wide range of stakeholders, including employees, suppliers, customers, local communities, and civil society organizations.
Responsive and Inclusive: Stakeholder engagement should be responsive and inclusive, ensuring that the voices of all relevant parties are heard and considered. Companies must actively seek input from stakeholders, address their concerns, and incorporate their feedback into decision-making processes.
Documentation and Reporting: Companies should document the stakeholder engagement process and report on the outcomes. This documentation helps to demonstrate that the company has genuinely engaged with stakeholders and taken their views into account.

Article 12: Complaints Procedure

Article 12 of the Corporate Sustainability Due Diligence Directive (CSDDD) mandates that companies establish a robust complaints procedure to address concerns from affected parties. This mechanism is essential for ensuring that stakeholders have a formal avenue to report issues and seek redress, thereby enhancing overall accountability and transparency in corporate operations.

Establishment of a Complaints Mechanism: Companies must create a clear and accessible complaints procedure that allows stakeholders, including employees, local communities, and other affected parties, to report any concerns related to adverse human rights or environmental impacts.
Accessibility and Awareness: The complaints procedure must be easily accessible to all stakeholders. Companies should ensure that information about the procedure is widely disseminated and that stakeholders are aware of how to file complaints.
Confidentiality and Protection: The mechanism must guarantee the confidentiality of complainants and protect them from retaliation. This encourages stakeholders to report issues without fear of negative consequences.
Timely Response and Resolution: Companies are required to address complaints promptly and effectively. The procedure should include clear timelines for acknowledging receipt of complaints, investigating the issues, and implementing remedial actions.
Documentation and Reporting: Companies must document all complaints and their resolutions. This documentation should be included in the company’s public reporting to demonstrate transparency and accountability.

Article 13: Supervision and Enforcement

Article 13 of the CSDDD outlines the responsibilities of Member States in supervising and enforcing compliance with the directive. Effective supervision is critical for the successful implementation of the directive and ensuring that companies adhere to their due diligence obligations.

Designation of Supervisory Authorities: Member States must designate competent authorities responsible for monitoring and enforcing the directive. These authorities should have the necessary resources and expertise to carry out their duties effectively.
Powers of Investigation: Supervisory authorities are empowered to conduct investigations into companies’ compliance with the due diligence obligations. This includes the authority to request information, conduct audits, and inspect company operations.
Imposition of Sanctions: Authorities can impose sanctions on companies that fail to comply with the directive. Sanctions may include fines, orders to cease certain activities, or other penalties proportionate to the severity of the non-compliance.
Coordination and Cooperation: Supervisory authorities in different Member States are encouraged to cooperate and coordinate their efforts to ensure consistent enforcement of the directive across the EU. This cooperation helps to address cross-border issues and ensures a level playing field for businesses operating in multiple Member States.
Reporting and Transparency: Authorities must report on their enforcement activities and the outcomes of investigations. This transparency helps to build trust in the regulatory system and demonstrates the authorities’ commitment to upholding the directive.

Article 14: CSDDD Penalties

Article 14 of the CSDDD specifies the penalties for non-compliance with the directive. These penalties are designed to be effective, proportionate, and dissuasive, ensuring that companies take their due diligence obligations seriously.

Substantial Fines: Companies that fail to comply with the directive can be subject to substantial fines. These fines are based on the company’s net worldwide turnover, ensuring that the penalties are significant enough to act as a deterrent.
Proportionality: The level of fines and other penalties must be proportionate to the severity of the non-compliance and the harm caused. This ensures fairness and encourages companies to prioritize due diligence.
Additional Sanctions: Beyond financial penalties, companies may also face other sanctions such as orders to cease certain activities, requirements to implement specific remedial actions, or restrictions on operations.
Public Disclosure: The imposition of penalties may be publicly disclosed, adding a reputational risk for non-compliant companies. Public disclosure enhances the deterrent effect and promotes a culture of compliance.

Article 15: Review and Reporting

Article 15 of the CSDDD requires the European Commission to periodically review the implementation of the directive and report to the European Parliament and the Council. This review process is crucial for ensuring continuous improvement and adaptation of the directive to emerging challenges and best practices.

Periodic Reviews: The Commission is required to conduct regular reviews of the directive’s implementation. These reviews assess the effectiveness of the directive, identify any challenges or gaps, and recommend improvements.
Reporting to Parliament and Council: The findings of the reviews are reported to the European Parliament and the Council. This reporting ensures that policymakers are informed about the directive’s impact and can make necessary adjustments.
Stakeholder Consultation: The review process includes consultations with stakeholders, including businesses, civil society organizations, and Member States. This inclusive approach ensures that diverse perspectives are considered in evaluating the directive’s effectiveness.
Adaptation and Improvement: Based on the review findings, the Commission can propose amendments to the directive to address any identified issues and incorporate best practices. This ongoing adaptation ensures that the directive remains relevant and effective in promoting corporate sustainability.

Corporate Sustainability Due Diligence Directive (CSDDD): Amendments to Existing Regulations

The Corporate Sustainability Due Diligence Directive (CSDDD) brings significant changes to the existing legal framework by amending Directive (EU) 2019/1937, related to whistleblower protection, and Regulation (EU) 2023/2859, which enhances corporate transparency and accountability frameworks. These amendments are designed to align current regulations with the comprehensive due diligence requirements of the CSDDD, creating a cohesive and robust legal environment for corporate sustainability.

Directive (EU) 2019/1937 Amendments

Enhanced Whistleblower Protections: The amendments to Directive (EU) 2019/1937, known as the Whistleblower Protection Directive, ensure that individuals who report violations of the CSDDD are protected from retaliation. This enhancement encourages transparency and accountability by safeguarding those who expose unethical practices.
Broader Scope of Reporting: The scope of what can be reported has been expanded to include breaches of due diligence obligations under the CSDDD. This change ensures that whistleblowers can report a wider range of violations, including those related to human rights abuses and environmental damage.

Regulation (EU) 2023/2859 Amendments

Increased Corporate Transparency: The amendments to Regulation (EU) 2023/2859, which focuses on corporate transparency and accountability, mandate that companies disclose their due diligence policies and practices in greater detail. This includes providing more comprehensive reports on identified risks, mitigation measures, and remediation efforts.
Strengthened Reporting Requirements: Companies are required to include detailed information about their due diligence processes in their annual reports. This requirement ensures that stakeholders have access to critical information about the company’s efforts to comply with the CSDDD.
Alignment with Sustainability Goals: The amendments ensure that corporate transparency frameworks are closely aligned with the EU’s broader sustainability goals. By integrating due diligence reporting into existing corporate transparency requirements, the amendments promote a unified approach to sustainability and accountability.