EU Corporate Sustainability Due Diligence Directive (CSDDD): A Game-Changer for Global Corporations

In a landmark move towards enhancing corporate accountability and sustainability, the European Union (EU) has enacted the Corporate Sustainability Due Diligence Directive (CSDDD). This regulation represents a significant step towards ensuring that businesses operating within the EU uphold high environmental and social standards throughout their operations and supply chains.  This mandatory legislation applies to both EU and non-EU companies operating in the EU, particularly targeting those in high-risk industries.

Understanding the CSDDD and the scope of the Regulation

The CSDDD, adopted by the European Parliament and Council, mandates that both EU and non-EU companies (and their subsidiaries) operating within the EU or selling goods and services to EU markets conduct due diligence on their environmental and social impacts throughout the entire supply chain of their business, including both upstream and downstream activities such as distribution or recycling. This due diligence directive encompasses a wide range of factors, including human rights violations, environmental degradation, and adherence to labour standards, setting obligations for large organisations in relation to actual and potential impact.

One of the most notable aspects of the CSDDD is its extraterritorial reach. While the directive primarily targets EU-based companies, it also applies to non-EU entities that conduct business within the EU market. This means that corporations operating outside of the EU, but selling products or services to EU consumers, are subject to the regulations outlined in the CSDDD. It is imperative for business to understand the CSDDD as it exposes businesses to penalties and civil liability for infringing these obligations. Companies are to adopt plans ensuring that their business model and strategy are compatible with the Paris agreement on climate change. The regulation affects the financial sector in a limited manner.

Non-EU Companies Impacted

The CSDDD's application to non-EU companies is a significant development with far-reaching implications. It encompasses various types of non-EU entities, including:

1. Multinational Corporations: Large multinational corporations headquartered outside of the EU but with extensive global operations may find themselves subject to the CSDDD if they conduct business within EU member states or generate revenue in the EU.

2. Foreign Suppliers: Companies that supply goods or services to EU-based companies must ensure compliance with the CSDDD, regardless of their location. This includes manufacturers, raw material suppliers, and service providers operating outside of the EU.

3. Online Retailers: E-commerce platforms based outside of the EU but selling products to EU consumers fall under the scope of the CSDDD. These companies must assess and mitigate the environmental and social impacts of their supply chains to comply with the directive.

4. Investment Firms: Non-EU investment firms managing assets or investments within the EU market are also subject to the CSDDD. This includes private equity firms, hedge funds, and other financial institutions.

Key Requirements for Non-EU Companies

As briefly mentioned above, non-EU companies covered by the CSDDD must adhere to several key requirements, including:

• Conducting due diligence to identify, prevent, mitigate, and account for actual or potential adverse impacts on human rights, the environment, and governance aspects, throughout the supply chain and including any subsidiaries.

• Implementing policies and risk management systems to address identified impacts and prevent future occurrences at all levels of operation, developed in conjunction with the company’s employees and their representatives and engaging with stakeholders.

• Providing transparency and accountability on a regular basis by disclosing relevant information related to their due diligence processes and outcomes. Where companies cannot prevent, mitigate, bring to an end or minimise the extent of all the identified actual and potential adverse impacts at the same time to the full extent, it should prioritise the adverse impacts based on their severity and likelihood.

Implications and Challenges

While the CSDDD represents a significant advancement in corporate sustainability and responsibility, it also presents challenges for non-EU companies. Compliance with the directive requires substantial resources, including financial investments and operational adjustments, to meet the stringent due diligence requirements. The directive also extends to relationships with business partners, ensuring that they adhere to ethical business practices. Business should “aim to use their influence to bring to an end or minimise the extent of the adverse impact caused by their business partners”. The question then stands – how much control one company can exert on another and if the business partner is unethical, how does one limit the adverse impact on businesses, particularly on small and medium enterprises. The CSDDD tries to address some of these questions in the directive by urging companies to “increase influence” – that is to threaten to terminate relationships with such nefarious business partners and therefore increasing leverage. How this may play out in practice is a different situation.

Moreover, navigating the complex regulatory landscape of the EU can be daunting for non-EU entities unfamiliar with EU laws and regulations. As such, companies must proactively engage with the CSDDD framework and seek guidance from legal and sustainability experts to ensure full compliance, especially by ensuring that suppliers and other third-party stakeholders provide undertakings to cooperate and ensure their own compliance to the CSDDD.

Conclusion

The EU Corporate Sustainability Due Diligence Directive marks a paradigm shift in corporate accountability, extending its reach beyond EU borders to non-EU companies operating within EU markets. By holding businesses accountable for their environmental and social impacts, the directive aims to foster sustainable and responsible business practices globally especially in third world countries where cheap labour and raw material is often exploited by big corporate players. Taking an idealistic view of this directive, one hopes that it will force companies to prevent and provide more transparency to prevent disasters such as the 2013 Rana Plaza collapse in Bangladesh.  Non-EU companies must recognize the significance of the CSDDD and take proactive steps to comply with its requirements when it begins to apply by 2027 and fully phased in by 2029, thereby contributing to a more sustainable and ethical global economy.

**Nothing in this article is intended to be or should be construed as legal or financial advice.**