4 Jul 22

Understanding EU's Directive on Corporate Sustainability Due Diligence

Understanding the EU Directive on Corporate Sustainability Due DiligenceIn February 2022, the European Commission issued its proposal for a Directive on Corporate Sustainability Due Diligence (CSDD), aiming to encourage ethical and sustainable business practices throughout all global value chains. These new regulations will provide companies with legal security and increase transparency for investors and consumers.

This mandate was introduced concurrently with the Corporate Sustainability Reporting Directive (CSRD), which will soon replace the Non-Financial Reporting Directive (NFRD). This Proposed Directive aims to enhance the CSRD's emphasis on disclosure obligations (and associated accountability measures) by demanding changes to national corporation laws.

The European Parliament and Council will be asked to approve the plan. After the Directive is enacted, Member States have two years to incorporate it into domestic legislation and provide the pertinent texts to the Commission.

What companies will be affected by the new due diligence rules?

EU companies:

Group 1: all EU limited liability companies of substantial size and economic power (with 500+ employees and EUR 150 million+ in net turnover worldwide).

Group 2: Other limited liability companies operating in defined high-impact sectors, which do not meet both Group 1 thresholds, but have more than 250 employees and a net turnover of EUR 40 million worldwide and more. For these companies, rules will start to apply 2 years later than for group 1.

Non-EU companies: active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU.

Small and medium enterprises (SMEs) are not directly in the scope of this proposal.

What will companies be required to do in order to comply?

  1. Integrate due diligence into policies
  2. Identify actual or potential adverse human rights and environmental impacts
  3. Prevent or mitigate potential impacts
  4. End or minimise actual impacts
  5. Establish and maintain a complaints procedure
  6. Monitor the effectiveness of the due diligence policy and measures
  7. Publicly communicate on due diligence

As a result, international treaties that safeguard human rights will be more effectively enforced. In violation of important environmental norms, this suggestion will assist in preventing negative environmental effects.

Additionally:

  • National administrative authorities nominated by Member States would be responsible for overseeing these new standards and may impose fines in case of non-compliance.
  • Victims will have the ability to pursue legal action for damages that may have been averted with sufficient due diligence efforts.
  • Group 1 enterprises need to have a plan to guarantee that their business strategy is consistent with reducing global warming to 1.5 °C in line with the Paris Agreement.
  • Directors of companies must be active if due diligence is to become an integral part of how they operate as a whole.

This proposal creates corporate sustainability due diligence commitment to report detrimental effects on human rights and the environment.

What should your business do next?

The CSDD’s ultimate form and implementation date are both unknown. However, it is known that businesses will eventually need to adopt environmental and human rights due diligence into every entity in their organisation, and their supply chain, as well as showcase their actions to their stakeholders. It goes without saying that implementing sustainable due diligence will take time. The proposed EU directive, however, demonstrates where to begin. Additionally, you will benefit from having more control over your value chain risks once compliance due diligence efforts are in place.

How can Greenstone help?

Greenstone enables you to engage your suppliers through its supply chain sustainability software, SupplierPortal, providing your business with transparency and compliance across your entire supplier network.

Greenstone works with its clients to build long-term supplier management processes that address and reduce risk, both now and in the future. We recognise that clients are on a journey and therefore the requirements change over time, particularly as a result of external factors such as regulation.

SupplierPortal is a flexible solution meaning that content can easily be altered, response frequencies can be set for suppliers, and importantly automated analysis and notifications continually drive up-to-date information. There are also customisable risk flags to automatically identify risks and automated action plans to resolve them. The ability to have two-way communication with your suppliers through the solution enables risk to be addressed efficiently and suppliers to be engaged at scale.

Explore: Understand the impacts and improve the transparency, of your supply chains - visit our content library focused on supply chain & responsible sourcing.

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SupplierPortal , CSDD