CSDD agreement – due diligence rules for large European companies

In December 2023. Negotiators from the European Commission and the European Parliament have reached an informal agreement on a new CSDD. Once it is adopted, companies operating in the EU and meeting the criteria indicated by lawmakers will be forced to actively implement due diligence that will serve to protect human rights and the state of the environment.

Historical context

CSDD (from Corporate Sustainability Due Diligence Directive) is a directive that has been discussed in Europe for years. In 2021. The European Parliament adopted a regulation on its development, and in February 2022. The EC has prepared a first draft. The document’s introduction states that most limited liability companies do not pay enough attention to how their operations and value chains affect societies and the environment.

Lara Wolters, an MEP involved in drafting the new legislation, stresses that the December agreement is a breakthrough of historical significance and can be seen as a tribute to the memory of the 1134 victims of the Rana Plaza tragedy in Bangladesh, which happened exactly 10 years ago. The new due diligence rules are designed to prevent the pursuit of short-term profits at the expense of people and the planet.

What is due diligence?

Under due diligence, the European Commission understands the processes by which a company is able to identify, prevent, mitigate and take responsibility for its actual and potential adverse impacts. CSDD focuses on human rights and the environment, among other issues. in areas such as child labor, slavery, exploitation, pollution, deforestation, overconsumption of water or destruction of ecosystems.

Due diligence is expected to be an integral part of companies’ policies and risk management systems in the future, influencing an organization’s approach, production processes and code of conduct. They will affect the company’s entire value chain, including sales, distribution, transportation and waste management.

Who will be affected by the new directive?

The CSDD will apply to EU and parent companies with more than 500 employees and a global turnover of more than €150 million. In addition, due diligence will be mandatory for companies with a staff of more than 250 people and a turnover of more than €40 million if at least €20 million is generated by the following sectors:

• Textile production and wholesale trade;
• Apparel and footwear industry;
• Agriculture including forestry and fishing;
• Food production and trade in agricultural raw materials;
• Mining and wholesale trade in mineral resources, as well as the manufacture of related products;
• construction.

In addition, the provisions of the CSDD will apply to non-EU companies if their turnover within the union exceeds the limits mentioned above. The directive requires all companies subject to it to adopt a plan to ensure that their business model remains consistent with the goal of limiting global warming to a maximum of 1.5°C. At the same time, it provides financial support for companies with more than 1,000 employees that implement such a plan.

How will the CSDD be implemented?

Covered by the new directive, companies will be required to identify, prevent, mitigate and end their negative impact on human rights or the environment, as well as remedy its effects. The CSDD will oblige investments for this purpose and appropriate agreements with partners to ensure the implementation of due diligence throughout the value chain. The provisions also include an obligation to provide support to partners belonging to the SME sector, which are not directly affected by the directive.

All EU member states will be obliged to create functional due diligence portals for complaints. Through them, companies will be able to interact with parties affected by their own or partners’ activities. The portals will also serve to provide information on the criteria set by the European Commission.

The principles of due diligence and the effectiveness of their implementation will be monitored by the supervisory bodies set up for this purpose in each member state. The latter will cooperate on a pan-European level within the framework of the Network created by the Commission, exchanging good practices. At the same time, they will have the authority to conduct inspections and investigations and impose fines of up to 5 percent. global turnover of a given company.

The CSDD also provides for making public the details of companies failing to comply with the rules in question, the obligation to compensate victims, and the promotion of due diligence in public procurement and concession awards.