*This article is based on information available until 15 April 2024.

The European Corporate Sustainability Due Diligence Directive (CSDDD) is a set of rules that require large companies, mainly those doing business in Europe, to conduct due diligence on the negative impacts of their activities on both human rights and the environment. The CSDDD (Corporate Sustainability Due Diligence Directive) is a regulation that makes it mandatory for large companies, mainly those doing business in Europe, to carry out due diligence (due diligence procedures) on the negative impacts of their activities on both human rights and the environment.

On 15 March 2024, the European Council approved the final text on the CSDDD, which began discussions on the Commission's proposal in February 2022 and has been the subject of detailed negotiations and significant compromises between the European Council and the European Parliament. The CSDDD, which has experienced a rigorous and complex negotiation process, including significant opposition from European countries such as Germany and Italy, is an important sustainability regulation that is also relevant to Japanese companies operating in the European region.

This article summarises the comprehensive review, discussions and amendments that led to the Directive in its current form, and then provides an overview of the Regulation itself.

1. discussion of the CSDDD

Since the formulation of the Guiding Principles on Business and Human Rights at the UN in March 2011, the EU has been aiming to centralise rules on sustainability due diligence. As such, the recently approved CSDDD can be said to aim for common rules among European Member States, to enable efficient compliance operations on a regional basis, and to contribute to establishing a level playing field and ensuring legal certainty of civil liability. However, the CSDDD has experienced significant modifications, as described below.

The draft Corporate Sustainability Due Diligence Directive (CSDDD), proposed in February 2022, was provisionally agreed in December 2023 after a tripartite consultation (European Commission, European Council and European Parliament).

The CSDDD requires covered companies to properly integrate due diligence (due diligence procedures) related to adverse environmental and human rights impacts into their corporate systems, including through the description of an 'approach, process and code of conduct'. In addition, it requires companies to adopt a climate change transition plan that ensures that their business models and strategies are in line with the Paris Agreement goal of limiting temperature increase to below 1.5°C.

The range of subjects that companies have to discuss through the CSDDD is wide-ranging, and can be simply described as environmental and human rights issues relating to the 'upstream to downstream' aspects of their business. Companies will be obliged to address the 'identification, assessment, prevention, mitigation, response and remediation' (due diligence) of these impacts not only on humans but also on the global environment as a whole, including child labour, slavery, pollution, spills and damage to ecosystems.

However, the Directive, which was due to be adopted by the European Council as of February 2023, was in danger of being dissolved as a tentative agreement due to opposition from countries such as Germany and Italy. In their opposition, the German side cited concerns that the excessive regulations and bureaucracy imposed by the EU would reduce the competitiveness of companies in the context of a prolonged economic downturn. In particular, they expressed great opposition to the CSDDD proposal's approach of imposing an obligation to carry out human rights and environmental due diligence even on indirectly affiliated companies compared to German domestic law, and the obligation of the CSDDD-affiliated companies to assume these indirect corporate responsibilities as well.

The main objections are.'Eligibility requirements for applicable enterprises.'and'Developing the scope of conducting due diligence.'in addition'Climate Change Transition Plan'.The report seeks to make amendments to the The next section summarises the significant amendments made as of March 2023.

2. a general summary of the revised content

I. 'Eligibility requirements for applicable enterprises.'

(Before correction)
4-group system
EU companies
- Group 1: EU companies with at least 500 employees and net worldwide turnover of at least EUR 150 million in the previous year.
- Group 2: Companies in high-risk businesses (textiles, agriculture, mineral extraction, etc.) with a turnover of at least EUR 20 million and at least 250 employees and a global net turnover of at least EUR 40 million

Non-EU companies (third country companies)
- Group 3: Enterprises with a turnover of more than EUR 150 million in the last financial year.
- Group 4: Enterprises with a turnover of more than EUR 40 million in the last financial year and where more than 50% of global turnover is generated by high-risk sectors.

(as amended).
EU companies(Provisions on high-risk projects deleted.):
　- Number of employees exceeds 1000 on average
　and
　- Worldwide net sales exceed EUR 450 million

The reporting obligation is imposed on the ultimate parent company, unless the main business of the ultimate parent company holds shares without being involved in management, in which case the operating subsidiary established in the EU is responsible.

Non-EU companies (third country companies):
　- Companies with net turnover in the EU of at least EUR 450 million in the most recent financial year.
　- Companies that are the ultimate parent company of a group falling into the above categories on a consolidated basis.

⚫︎ Applicable period of time
The CSDDD makes the following distinction with regard to the period of application of the Directive along the scale of the enterprise, both within and outside the EU. The following application is expected for 'companies outside the EU', to which Japanese companies may be related.

(Prerequisite.)
'a company with a net turnover in the EU of at least EUR 450 million in the most recent financial year' & 'the ultimate parent company of a group that falls into the above categories on a consolidated basis'

　1. companies with net turnover exceeding EUR 1.5 billion in the previous year: applies after 3 years of the Directive's entry into force
　2. companies with net turnover exceeding EUR 900 million in the previous year: applies four years after the Directive enters into force
　3. enterprises other than those mentioned above and fulfilling the preconditions: apply after 5 years of the Directive's entry into force

Given that the CSDDD was approved as of March 2024, some Japanese companies operating in the EU will need to comply with this Regulation from 2027.

II. "Developing the scope of conducting due diligence"

(Before correction)
- In-house and its subsidiaries
- All business partners in upstream and downstream
(within the scope of conducting due diligence on all business processes, excluding disposal by consumers).

(as amended).
- In-house and its subsidiaries
- All business partners in upstream and downstream
(Product recycling and disposal, etc. in downstream were added as not covered.)

III. 'Climate Change Transition Plan'

(Before correction)
- Develop and implement a climate change transition plan suitable for the 1.5°C target of the Paris Agreement.
- Financial incentive provisions introduced for directors, management and others to implement the plan.

(as amended).
- Develop and implement a climate change transition plan suitable for the 1.5°C target of the Paris Agreement.
– Introduction of financial incentive provisions deleted.

3. summary.

The revised content confirms that the CSDDD was discussed as to the scope to which it should be applied while preserving its essence. As the Directive acts as a supranational law within Europe, each European country is required to enact national legislation in line with the rules of the CSDDD.

This paper reviews the general flow of the CSDDD and identifies modifications.

The next article will review the more detailed content of this Directive and then summarise the future of sustainability reporting in the European region.

aiESG offers a service to provide sustainability analysis of corporate activities. If you have any questions not only about this CSDDD, but also about sustainability in corporate reporting, please contact us.

Enquiry:
https://aiesg.co.jp/contact/

*Related articles*.
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[Commentary] Alphabet soup - Disorder and convergence of sustainability standards.
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