The European Union greenlit a directive regulating how companies can avoid damaging the environment and safeguard human rights. The directive has wide-ranging implications for companies across the EU that do business in and outside the bloc.
On Dec. 14, 2023, the European Parliament, European Commission and Council of Ministers agreed on the Corporate Sustainability Due Diligence Directive (CSDDD) for global supply chains. The Commission published the legislative proposal back in February 2022, and it was adopted in December the same year.
The directive’s reach extends globally and failure to comply risks fines of up to 5% of a company’s turnover. It encompasses a company’s own operations and those of its subsidiaries and partners, both upstream and partially downstream, such as distribution or recycling.
Companies must publicly communicate fulfilment of due diligence obligations, having made them an integral part of corporate policy and risk management. They must also identify, prevent and mitigate actual or potential negative impacts on human rights and the environment, as well as eliminate or minimize actual impacts. They also need to monitor the effectiveness of due diligence strategies and measures, and establish a grievance mechanism.
These obligations apply to companies of certain size and financial weight. This includes EU limited liability companies with more than 500 employees and global net turnover exceeding €150 million; companies operating in certain sectors – textiles, agriculture, raw materials – with a high loss potential, more than 250 employees and global net turnover of €40 million; and non-EU companies that fulfil the above thresholds and generate turnover in the EU. This, of course, includes lubricant manufacturers. The new directive does not yet affect SMEs.
The trailblazing German Supply Chain Law (LkSG), which has been in force since Jan. 1, 2023, affects companies with more than 3,000 employees. From Jan. 1, 2024, this threshold will be 1,000 employees.
The CSDDD’ requirements are much broader. It requires companies must also observe environmental obligations in particular, such as the 1.5 degrees Celsius climate target.
If business partners cannot prevent or end the adverse effects on human rights or the environment, companies must terminate business relationships as a last resort, as in the LkSG.
The CSDDD also lays down rules on penalties and civil liability for infringing those obligations. It requires companies adopt a plan ensuring that their business model and strategy are compatible with the Paris Agreement.
Sanctions are significant and must be published, leading to reputational damage. In addition to fines, the directive introduces civil liability. Affected parties, including unions and NGOs, can assert claims within five years.
The CSDDD will surely have an impact on the LkSG, which will have to be amended once the directive is adopted. There are apparently discussions as to whether the LkSG, which is perceived by companies as a heavy bureaucratic burden, should be weakened or even suspended in certain areas until the CSDDD is implemented. However, there are no concrete formulation proposals for this as yet.
Rumors are that these could come in the short term with the draft bill on the implementation of the Corporate Sustainability Reporting Directive.
The Commission and the Council will endorse and formally adopt the provisional agreement in the coming weeks.
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