Corporate Sustainability Due Diligence Directive: new sustainability obligations for European companies

Corporate Sustainability Due Diligence Directive: Adoption and Implementation

On May 24, 2024, the Council of the European Union formally approved the Corporate Sustainability Due Diligence Directive (CSDDD), a legislative text that must be implemented through specific national legislation in each Member State of the European Union. Although the obligation for national transposition has a deadline set at two years, it will be crucial for European companies – including, of course, Italian ones – to immediately start complying with the obligations imposed by the directive to be prepared when it comes into effect.


New Obligations for Companies: Human Rights and Environmental Protection

The directive’s objective is both simple and revolutionary: to hold European companies accountable in the fight against the negative impacts of their activities on the environment and human rights. In other words, the European Union imposes specific obligations on European companies to ensure that, in relation to their business activities, no actions are taken that violate fundamental human rights or harm the environment.Corporate Sustainability Due Diligence Directive
Developments in this direction are not new in the European landscape, as demonstrated by the Duty of Vigilance Act in France or the Supply Chain Due Diligence Act in Germany. However, this directive aims to harmonize the due diligence process required of companies so that all major players in the European market can adhere to common rules.

The obligations set out in the directive are various and can be summarized as follows:

  • Implement corporate policies that include a specific due diligence obligation aimed at detecting any potential human rights violations;
  • Identify and, where necessary, mitigate any risks arising from human rights violations;
  • Resolve and remedy any confirmed violations;
  •  Adopt an internal action plan to limit global warming to 1.5° degrees, as provided by the 2015 Paris Agreement.

Subjective Scope of the CSDDD

At first sight, the new directive seems to be aimed at a limited number of companies. The ones involved in the obligations arising from the CSDDD will be:

  • Companies based in the EU with more than 1,000 employees and a consolidated annual worldwide net turnover exceeding 450 million euros;
  • Companies based outside the EU with a consolidated annual worldwide net turnover exceeding 450 million euros.

According to the European Commission, this would involve about 7,000 companies.
Despite these numbers, it is certain that the impact of the new directive will be significantly more disruptive. The obligations imposed by the CSDDD will apply to the entire supply chain of directly involved companies, including both suppliers and distributors. The liability profile of companies may increase if the actions of their business partners are not adequately considered, monitored and, where necessary, mitigated. Moreover, where it is impossible to mitigate a potential violation, the company is required to suspend the business relationship.
Therefore, any company that wants to remain competitive and attractive in the national and European market cannot afford to disregard the proper implementation of this directive, thus avoiding the risk of becoming, in fact, obsolete.

Tools for Companies to Properly Implement the Corporate Sustainability Due Diligence

But what are the most appropriate tools for companies to correctly implement the Corporate Sustainability Due Diligence Directive?
Certainly, it will be necessary to review existing contractual agreements with their business partners, providing for ad hoc clauses that take into account the new obligations imposed by the directive. About that, he CSDDD expressly provides that the European Commission will issue a series of guidelines to guide companies in the compliance process. This activity, although important, will not in itself be exculpatory, as the directive itself clarifies that ad hoc clauses within contracts with business partners will not be sufficient to excuse the companies’ behavior and, consequently, free them from any form of civil liability.
Companies will also be required to review their internal policies to implement a proper due diligence process capable of identifying any potential violations and acting accordingly.
Thus, effective policies that take into account the actual relationship with the company’s business partners will be of primary importance.

Sanctions and Reputational Impact

Clearly this is not just a token directive from the sanctions system it provides. The CSDDD explicitly states that national authorities can impose a fine on companies that violate the obligations arising from the directive of up to 5% of worldwide turnover.
In addition, there is the inevitable reputational impact. Such a consequence appears even more “severe” than a mere fine, as it could mark the company’s credibility from a commercial standpoint.

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