Sustainability Blog

Directive on Corporate Sustainability Due Diligence

By Apurva Gosalia - May 24, 2022

The European Commission yesterday closed the eight-week feedback period for its proposed Directive on Corporate Sustainability Due Diligence (CSDD). If adopted unchanged, this long-awaited bill will require certain very large European and non-European companies to set up mandatory due diligence practices. The intention is to identify, prevent or mitigate and ultimately cease their corporate activities’ adverse impacts on human rights and the environment. 

In addition, the proposed law introduces a specific climate change obligation and further specifies a duty of care for directors linked to sustainability matters. 

The commission’s proposal thereby aims to foster sustainable and responsible corporate behavior and to anchor human rights and environmental considerations in companies’ operations, value chains and corporate governance.

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>Read more about European sustainability legislation here.

In recent years, there has been increasing attention paid to the idea that a company, as a participant in society, has its own responsibility to consider its business and its consequences in the light of sustainability and environmental, social and governance matters. 

A trend has emerged whereby new sector-specific EU-regulations and general mandatory rules increasingly stipulate how companies should address issues in relation to sustainability, ESG and their activities, and what the legal implications are if they fail to do so. Both the European Parliament and the European Council have called on the commission to take regulatory action in this respect. 

After a long period of research and various initiatives from different angles, the commission adopted the CSDD proposal as important component of the European Green Deal toward a sustainable future. 

The proposal complements other regulatory initiatives, such as the Commission’s proposal for a Corporate Sustainability Reporting Directive (CSRD), Sustainable Finance Disclosure Regulation and the Taxonomy Regulation. In addition, the CSDD proposal intends to be in line with the United Nations Guiding Principles and the OECD Guidelines for Multinational Companies.

The scope of the current CSDD proposal captures companies that meet the following criteria:

  • EU-companies with 500 or more employees and net turnover of more than €150 million worldwide, as well as companies with more than 250 employees and net turnover of €40 million and more worldwide, operating in defined high-risk sectors, for example textiles, agriculture and minerals extraction. For the latter, the rules start to apply two years later.
  • Non–EU companies with net turnover of €150 million and above in the EU, as well as companies with net turnover of €40 million and more in the EU, when 50% and more of this net turnover was generated in one or more of high-risk sectors.

Micro companies and SMEs are not directly in the scope of the CSDD proposal but they might be indirectly affected as a result of bigger companies’ actions to comply with the new due diligence requirements.

The current CSDD proposal could cover an estimated 13,000 EU companies and 4,000 non-EU companies operating in the bloc`. These could also include base oil, additive and lubricant companies. The directive will also require companies draft a plan to ensure their business model and strategy are compatible with limiting global warming to 1.5 degrees Celsius in line with the Paris Agreement. 

In particular, the plan should identify the extent to which climate change is a risk for, or an impact of, the company’s operations. The company must include emission reduction objectives in its plan if the risks are, or should have been, identified.

The variable remuneration of directors should be linked to the achievement of the plan if ESG aspects are taken into account in the remuneration. Implementation of the CSDD proposal adds a specific consideration for directors when fulfilling their duty to act in the best interest of the company. Directors must consider the consequences of their business decision for sustainability matters, including, where applicable, human rights, climate change and environmental consequences in the short, medium and long term.

Adopting the proposed CSDD is just the start of a procedure that involves parliamentarians and councilors discussing and possibly amending it. Once adopted, EU member states will have two years to transpose the directive into their national legislation.

STAY SuSTAYnable and Diligent!

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