The EU has a legally binding objective to be the world's first climate-neutral region no later than 2050. Part of this entails more stringent requirements for larger companies to ensure sustainability throughout the production and supply chain. An EU proposal for a directive for due diligence in respect of the environment and human rights was put forward during 2022. The proposed directive contains wide-ranging requirements for companies' sustainability management, with the aim of reducing the adverse effects that their operations have for human rights and the environment.
WHICH COMPANIES ARE AFFECTED BY THE CSDD DIRECTIVE?
It is proposed that the requirements apply for companies within the EU which, over a period of two successive financial years, either:
- have more than 500 employees and net global sales of more than EUR 150 million globally, or
- have more than 250 employees and net global sales of more than EUR 40 million and with a turnover that is at least 50 per cent attributable to certain specific sectors that are deemed to have a major environmental impact, including textiles, clothing and footwear, agriculture, forests, food and beverages, minerals and metals.
The requirements will also include companies that are registered outside the EU, but which have net sales in the EU according to point 1 or point 2 above.
Even though it is only larger companies that will be directly affected by the directive, smaller companies will be indirectly affected in that they are part of the larger companies' value chains and will thereby need to provide sustainability-related information to other actors in the value chain.
WHICH REQUIREMENTS DOES THE DIRECTIVE ENTAIL FOR THE COMPANIES?
The proposal for the Corporate Sustainability Due Diligence Directive (CSDD Directive) consists of four main parts:
- requirement for due diligence processes in value chains,
- requirement for a plan for climate transition based on the Paris Agreement's targets,
- claims and supervision, and
- regulation of management's responsibility and duties.
Due diligence processes in value chains shall be performed with the aim of identifying and, where appropriate, tackling companies' adverse impact on human rights and the environment. The processes shall be integrated in all the companies' policies and risk management system and shall constitute the basis to ensure that companies' decisions are made taking into account human rights and environmental aspects.
Companies shall also adopt a plan for climate transition based on the Paris Agreement's target to limit global warming to 1.5 degrees Celsius. The plan shall indicate the extent to which climate change constitutes a risk for the company's activities or is a consequence of the company's activities. If climate changes are identified as a significant risk for or consequence of the company's activities, the plan shall include emissions reduction goals. The plan shall be included in companies' sustainability reports.
To encourage compliance, the CSDD Directive contains rules regarding claims and supervision. The member countries must introduce rules for non-contractual claims that will be triggered if companies have neglected to fulfil their obligations and the omission led to an adverse effect that entailed damage that should have been identified, prevented, limited, stopped or minimised through suitable measures. One or a number of supervisory authorities will be appointed to monitor companies' compliance with the requirements set by the CSDD Directive. The supervisory authorities will be authorised to impose penalty charges based on the companies' net global sales, which means that it might entail large sums.
WHAT HAPPENS NOW?
The EU will continue working on the CSDD Directive and it is currently not possible to say when the CSDD Directive will enter into force or precisely which formulation it will then have. However, based on the proposal's current design and the EU's ambitious sustainability targets, it will entail major challenges for the companies that are not already actively engaged in the issues. It is therefore important that companies start surveying their value chains now, including an examination of how subcontractors are engaging with human rights and environmental issues in order to be as well prepared as possible to meet forthcoming legal requirements.
Prioritising ESG work also creates added value for the companies' operations as a whole and is a success factor in attracting capital. A positive example for Sweden is that Swedish impact companies brought in the most capital in Europe last year. According to a report from Sweden Tech Ecosystem, during 2021 more than half of Swedish venture capital was invested in impact companies, which are defined in the report as companies that meet at least one of the UN's sustainable development goals. A total of EUR 4.3 billion was invested in the sector, putting Sweden in pole position in Europe in terms of the amount of impact-focused capital.