The Corporate Sustainability Due Diligence Directive (CSDDD) is a proposed EU directive intended to ensure that businesses address adverse impacts of their actions inside and outside Europe. It will have a synergetic relationship with the reporting requirements in the Corporate Sustainability Reporting Directive (CSRD), which we discussed in our recent article.
Unlike the CSRD, the CSDDD is not yet in force and is not expected to become so before 2024. Once the CSDDD is adopted, EU Member States will then have two years to ensure that domestic legislation is compliant with the CSDDD. There will also be additional phase-in periods, which will apply at different rates depending on which category a company falls within
The CSDDD will apply to the following:
“High impact sectors” are defined sectors where there is a high risk of human rights breaches or harm to the environment such as textiles, agriculture and extraction of minerals. At least 50% of a company’s net turnover must have been generated in a high impact sector to qualify for the purposes of the CSDDD. Micro companies and SMEs are not concerned by the proposed rules.
Where a company is caught by the CSDDD, the requirements will apply to its own operations and those of its subsidiaries and direct/indirect established business relationships.
What does the CSDDD mean for UK companies?
The UK government has confirmed that it currently has no plans to replicate the CSDDD in UK law although some UK companies may fall within the scope of the CSDDD where they are generating significant turnover in the EU.
However, there will be knock on effects for UK companies that are out of scope. It is likely that we will see in scope companies asking for contractual assurances in order to ensure their own compliance with the CSDDD, and that corporate transactions will also be affected. For example, if a UK company is being purchased by an in scope company then it will be subject to a greater degree of due diligence and potentially will be asked to give more extensive warranties by the buyer.
UK companies with strong existing commercial relationships with in scope companies (e.g. they may have significant exports to countries in the EU) may find that those companies are likely to pass on requirements to their business partners for matters like providing information or conducting verification. If you have a strong trading relationship with a company that you think may be within scope of the CSDDD, we recommend starting the conversation early about how that may impact their expectations of your relationship going forwards.
What are the obligations?
Corporate due diligence
The CSDDD will require EU Member States to establish a corporate due diligence duty in national law. All affected companies will need to identify, prevent, mitigate and account for negative human rights and environmental impacts of their actions, including in their value chains inside and outside Europe. These include the right to strike and the right to collective bargaining, certain labour rights, and restrictions on causing measurable environmental degradation in certain situations. All Group 1 companies will have an additional obligation which requires them to ensure that their business strategy is compliant with the aims of the Paris Agreement, specifically to limit global warming to 1.5 degrees centigrade.
The CSDDD imposes new duties on directors of EU companies in Group 1 and all Group 2 companies to:
- Ensure that human rights, climate change and environmental decisions are all considered when making decisions, and
- Put in place and oversee the due diligence actions and policies mandated by the CSDDD,and incorporate them into the company’s strategy.
Additionally, the EU proposes that, where directors’ variable remuneration is linked to their contribution to the company’s business strategy and long-term interests and sustainability, emission reduction plans should be embedded in the directors’ financial incentives to ensure the plans are properly implemented.
Failure to comply with the CSDDD
There are three limbs to the enforcement strategy of the CSDDD. These are set out below: