In a landmark move, the Committee of Permanent Representatives of the EU Member States (COREPER) and the European Parliament have finally given their green light to the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D), setting a new precedent for corporate accountability within the European Union. The decisive deal was reached in the Council on March 15, 2024, after intense negotiations, and it was followed by a green light at the Parliament on March 19. The final steps that will turn the new, revised version of the CSDDD into law should be taken in late April, with a plenary vote in Strasbourg.
The CSDDD mandates companies to conduct due diligence not only on their direct actions and adverse impacts but also on those of their subsidiaries, and throughout their supply chain.
This marks a shift towards ensuring that businesses operating within the EU, as well as non-EU companies with substantial business activities in the region, adhere to stringent environmental and human rights standards and ensure that the same standards are adopted throughout their value chains - thus indirectly affecting the environmental performance of their extra-European suppliers.
After extensive debate and considerations around the bureaucratic burden the directive might impose, particularly on small and medium-sized enterprises (SMEs), the scope of the CSDDD has been reduced. Championed by EU countries such as Germany, France, and Italy, this recalibration now means that the directive will apply exclusively to companies with more than 1,000 employees and a turnover exceeding 450 million euros. The largest companies (>5,000 employees) will have less time to comply, compared to relatively smaller undertakings in scope (with less than 3,000 or 1,000 employees).
Moreover, the initially proposed "lower threshold" for sectors with high environmental and social impact, such as agriculture, has been eliminated, further limiting the directive's coverage.
While this revision narrows the directive's initial scope, with some early estimates suggesting that it now covers only 30% of the companies initially targeted, the CSDDD will still directly affect over thousands of EU-based companies, and a significant number of non-EU-based companies.
Moreover, by enforcing supply chain due diligence, the regulation will also indirectly impact suppliers of large European companies (both EU and non-EU based): Those who already have comprehensive ESG data collection systems and procedures in place, will be at a significant advantage when complying with their partners’ data requests.
The CSDDD goes beyond mere disclosures, demanding transparency and active engagement from companies in identifying, preventing, and mitigating adverse impacts on human rights and the environment - and, crucially, it does so by pressing companies to identify adverse impacts on their value chains.
This involves laying out detailed due diligence processes, which must be incorporated in companies’ policies, effective prevention and management of potential risks, and the establishment of grievance mechanisms and civil liability to address concerns.
Companies must also create comprehensive action plans to cease or address adverse impacts, whenever applicable.
Crucially, when companies are unable to address (that is, end or prevent) significant adverse impacts stemming from certain business relationships, they will have to end the relationship with those business partners. This means that the regulation will also have a significant impact on non-EU businesses who entertain business relationships with large companies located in the EU.
However, it’s important to stress that the CSDDD aims at minimizing the burden on smaller companies: for instance, the regulation emphasizes the role that large companies under the scope of the regulation can play in supporting SMEs in addressing their adverse impacts, especially in the case in which “such requirements would jeopardize the viability of the SME”.
It's crucial to differentiate the CSDDD from the Corporate Sustainability Reporting Directive (CSRD).
While the CSRD focuses on enhancing transparency through detailed sustainability reporting for EU-operating companies (and certain non-EU companies), the CSDDD zeroes in on the whole operations and supply chain due diligence required to manage and mitigate adverse impacts on human rights and the environment.
This includes implementing action plans, investment planning, and securing contractual assurances from business partners to prevent or mitigate negative impacts.
That being said, the CSRD and the CSDDD are closely related to each other. By collecting environmental and social information to comply with the reporting requirements laid out in the CSRD, companies will be well-positioned to identify adverse impacts as required by the CSDDD, and vice-versa. Moreover, the CSDDD additionally complements other European regulations on sustainability, such as the EU Taxonomy and the SFDR - both of which aim at ensuring more transparency and accountability around sustainability in the financial sector, and help investors allocate capital to truly sustainable business activities.
In general, reporting is a critical step of the due diligence process as laid out in the CSDDD, and better ESG data collection and verification lies at the core of both regulations.
Companies can benefit immensely from setting up the right ESG and sustainability data collection procedures, systems and technologies - even if they do not fall under the scope of either of these regulations today. As we have seen before, even SMEs who plan to establish business relationships with large European companies will benefit from setting the right data collection processes in action.
Briink can support you in your ESG data collection journey - whether you plan to collect data from your suppliers, or you are a supplier yourself - by leveraging AI to help you extract ESG insights in minutes from any type of document or website. We have worked with companies like Continental to help them on their ESG data collection journey. You can test our technology for free here.
The approval of the CSDDD represents a significant milestone in the EU's commitment to sustainable development and corporate accountability. The directive sets a new standard for corporate conduct across global value chains - and even with a reduced scope, it underscores the importance for companies of all sizes to start adapting their ESG data collection systems and procedures, and to start placing ESG considerations at the core of their business strategy and models.
If you are interested in learning more about how you can bring yourselves ahead in the quest for CSDDD and CSRD compliance, or if you are an auditor dealing with a large scale of ESG assurance requests, we can support you in your journey. Get in touch with us to explore how we embed AI in your ESG data collection and verification systems, and help you reduce the bureaucratic burden of all upcoming ESG regulations.
Find the final text endorsed by the Council here (March 15, 2024)
Original proposal of the Commission (February 22, 2024)
.svg)
.svg)
