The EU's new corporate sustainability due diligence directive is approaching – are you ready?
Published: June 2022
What is the EU’s Directive on Corporate Sustainability Due Diligence?
The EU’s Directive on Corporate Sustainability Due Diligence (CSDD) sets out a cross-sector EU standard for a human rights and environmental due diligence strategy for companies to adopt. It will require both EU and non-EU companies to identify, and, if necessary, take steps to prevent or mitigate adverse impacts on human rights and the environment in the companies’ own operations, their subsidiaries, and supply chains.
The era of companies being able to turn a blind eye to what is happening in their supply chain is soon coming to an end. In February 2022, the European Commission published its long-awaited proposal for a Directive on corporate sustainability due diligence (CSDD). Now, the draft direction is under consultation by the European Parliament and Council for approval – which is estimated to take up to one year. Once it's adopted, member states will have two years to transpose the Directive into national law. This means that it is high time for companies to get familiar with it and understand how it can come to affect your organization as failure to comply could become costly.
In this blog, we will go through everything you need to know about the EU's new CSDD directive: is your organization within the scope? What is expected from you, and most importantly – what are the consequences of not complying in time?
Which companies are in scope?
The EU’s Corporate Sustainability Due Diligence Directive applies to the following companies and sectors:
Group 1: All EU companies with over 500 employees and 150 million EUR in net turnover;
Group 2: Companies operating in defined high-impact sectors*, with over 250 employees and 40 Million EUR in net turnover (these rules will apply two years later than for group 1).
Active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU.
*The Commission has aligned the definition of high-impact sectors with guidance from the Organisation for Economic Cooperation and Development and they are listed in the Proposals as:
- The manufacture of textiles, leather, and related products (including footwear) and the wholesale trade of textiles, clothing, and footwear;
- Agriculture, forestry, fisheries, the manufacture of food products, and the wholesale trade of agricultural raw materials, live animals, wood, food, and beverages;
- The extraction of mineral resources regardless of where extracted (including crude petroleum, natural gas, coal, lignite, metals, and metal ores, as well as all other, non-metallic minerals and quarry products), the manufacture of basic metal products, other non-metallic mineral products, and fabricated metal products (except machinery and equipment), and the wholesale trade of mineral resources, basic and intermediate mineral products, including metals and metal ores, construction materials, fuels and chemicals, and other intermediate products.
What happens if you don’t comply in time?
Companies that fail to comply with the EU’s Corporate Sustainability Due Diligence risk being faced with a compliance order or even large financial penalties based on the company’s turnover. The proposal affirms that companies will be liable for damages that could have been prevented if it was identified, mitigated, or brought to an end through appropriate measures. This is largely to ensure effective compensation of victims of adverse impacts – and each member state is required to lay down rules governing the civil liability of companies for damages arising due to its failure to comply with the due diligence process.
What are the CSDD requirements?
The process set out in the EU’s HREDD directive draft is based the OECD Due Diligence Guidance for Responsible Business Conduct, which includes due diligence measures for companies to identify and address adverse human rights and
The CSDD requirements built on the OECD procedure encompass the following six steps:
- Develop, implement, and communicate a policy on Human Rights and Environmental Due Diligence.
- Develop a process to assess and identify the most significant risks within operations, suppliers, and business relationships.
- Take action on the most significant risks & develop a remediation plan to cease, prevent and mitigate risks.
- Track the implementation and results to evaluate the effectiveness of due diligence procedures (at least once every 12 months).
- Publish an annual statement on your website to communicate the relevant due diligence measures taken during the previous calendar year.
- Cooperate with other parties to enable remedy.
How can my organization prepare for the requirements set out by the EU’s CSDD?
One of its key requirements is for companies to implement human rights and environmental due diligence measures that cover their entire supply chain – not just Tier 1 suppliers. This includes suppliers, sub-suppliers, and other entities in the supply chain. This might add further complexity to your already existing supply chain risk assessments and supply chain risk management, but at the end of the day, there are no short-cuts around it. In scope companies have no choice but to start taking full control over the actions in their supply chains if they haven’t already – or they may face severe penalties that could jeopardize the entire future of their business.
Get Started with Worldfavor
Luckily – there is help to get! Worldfavor is the leading global platform for organizations to connect with their suppliers to access the ESG data they need to ensure compliance with current and upcoming regulations. The platform helps you to access, analyze and sync your supplier information with international standards (such as OECD guidelines) for you, so you don’t have to spend valuable time chasing and making sense of the data you need.
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