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The EU has adopted the new Directive (March 2024) on sustainability: the Corporate Sustainability Due Diligence Directive (CSDDD). What does this Directive mean for companies? And how exactly does it differ from the Corporate Sustainability Reporting Directive (CSRD), which came into force this year?
In 2019, the European Commission made its first proposal for the CSDDD. While a due diligence obligation for companies on sustainability had until then only been included in voluntary (UN) guidelines. this proposal led for the first time to a general legal duty of care for companies to look at the impact of their production processes on issues around Human, Environmental and Governance (also called ESG issues). A big step and thus not illogical that years of discussion followed, both between the European institutions, and with companies and civil society organizations. The proposal was negotiated and tinkered with right into the final stages of the EU decision-making process, but finally, in March, it resulted in an agreement. And thus the CSDDD is a fact.
What does the due diligence requirement mean and to which companies will it apply? And how does it differ from the CSRD, which many companies also already have to comply with?
Due diligence refers to the duty of care of companies to counteract impacts or risks thereof with respect to people and the environment in their production processes. The due diligence obligation must be fulfilled by following six steps:
These steps should lead to the control of risks to people and the environment as well as the recovery of impacts that have occurred.
"An important aspect is that the due diligence obligation does not only apply with respect to a company's own location, but extends throughout the chain."
'Risks to people and the environment' refers to a very wide range of sustainability issues that may be at stake in production processes. It may involve all kinds of issues concerning working conditions, safety on the shop floor or equal pay. It may also involve CO2 emissions, water consumption or, for example, damage to biodiversity.
An important aspect is that the due diligence obligation does not only apply with respect to a company's own location, but extends to the entire chain, both upstream (towards suppliers and suppliers of those suppliers) and downstream (towards customers and consumers). This requires companies to understand their supply chain and analyze and assess risks throughout the chain.
Although an earlier version of the CSDDD formulated the scope broadly, the final version states that only companies with more than 1,000 employees and a turnover of at least €450 million per year are covered by the CSDDD. This is only 0.1% of all companies in the EU. But because the CSDDD makes these companies responsible for what happens in their chains, the suppliers of these large companies in particular will also be indirectly affected by the obligations of this Directive.
The CSDDD will take effect in phases. Companies with more than 5,000 employees will have to comply with the Directive starting in 2027. For companies between 1,000 and 5,000 employees, the Directive will become applicable in subsequent years.
"The CSDDD, even if they themselves are not directly covered by it, can be seen as yet another additional obligation for companies."
Recently, the CSRD came into effect, which requires companies to report on sustainability. The essence of this is that through a sustainability report, companies provide insight into sustainability risks and impacts. In addition, companies must report on policies, targets and measures, including KPIs. Whereas the CSDDD defines the obligations with respect to business-related risks and impacts on people and the environment, the CSRD specifies where those same risks and impacts must be reported.
For companies, even if they themselves are not directly covered by it, the CSDD may be seen as yet another additional obligation. As a matter of fact, it is. But there is also no need to make it any heavier than it is. Due diligence looks at risk management and in that sense has much common ground with quality and food safety. The way of thinking and approach is therefore not unknown and within reach for many companies.
In addition, companies generally already have their management processes on quality and food safety in place. Implementation of sustainability risks can be incorporated into these. This obviously requires effort, but can be tackled step by step. It also ultimately leads to a focus on sustainability, good control of the processes and less effort to meet customer questions and requirements.
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