Europe: The Corporate Sustainability Due Diligence Directive (CSDDD) is a regulation that makes it mandatory for large companies, mainly those doing business in Europe, to conduct due diligence (procedures to properly assess and address the actual and potential 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 (procedures to properly assess and address actual and potential negative impacts) on both human rights and the environment.
The previous article summarised the twists and turns in the adoption of the CSDDD and gave a broad overview of the target enterprises, etc.
[Commentary] Overview and amendments to the European Corporate Sustainability Due Diligence Directive (CSDDD).
https://aiesg.co.jp/report/240426_csddd/
The CSDDD was formally adopted by the Council of the EU on 15 March 2024 and approved by the EU Parliament on 24 April. A two-year period has been set aside for institutions to enact national legislation in EU Member States in the future, after which it is expected to be fully utilised.
The aim of this issue is to provide an overview of the sustainability response in the European region by summarising the details of the CSDDD.
1. conditions and timing of CSDDD-eligible enterprises
The CSDDD aims to establish a framework for companies to identify, prevent, mitigate and account for adverse human rights and environmental impacts* The CSDDD encompasses due diligence requirements** that extend to a company's direct actions, subsidiaries and supply chain, and outlines the business model and strategy to align with the principles of sustainability and outlines the obligations of companies to align their business models and strategies with the principles of sustainability. The Directive's scope of application is expressed by the phrase 'chain of activities', which specifies that spillover economic relationships, such as 'indirect business partners', are also within the scope of due diligence. (hereafter referred to as the 'Chain of Activities').
The Directive mandates the integration of human rights and environmental considerations into corporate operations and governance. In addition, they must adopt a transition plan to adapt their business model to the Paris Agreement's global warming mitigation target of within 1.5°C.
*EU Parliament press release:.
https://www.europarl.europa.eu/news/en/press-room/20240419IPR20585/due-diligence-meps-adopt-rules-for-firms-on-human-rights-and-environment
**Due diligence refers to "the investigation of the value and risks of a company or investee in order to make an investment" (SMBC Nikko Securities websiteSee also).
The specific target company categories and timing of application of the regulation are as follows
Figure 1: Overview chart of the conditions for enterprise application of the CSDDD and the timing of application
(European Commission (executive of the EU)andEuropean ParliamentPrepared by the author with reference to)
Upon formal adoption as of April 2024, EU Member States will enact national legislation during a two-year adjustment period.
The EU Parliament has provided the following information on the expected application date of the CSDDD:
a. companies with at least 5,000 employees and global turnover of at least EUR 1.5 billion: from 2027 onwards
b. companies with more than 3 000 employees and global turnover of more than EUR 900 million: from 2028 onwards
c. companies fulfilling all remaining conditions (more than 1000 employees and global turnover of more than EUR 450 million): from 2029 onwards.
As the CSDDD obliges parent companies to conduct due diligence on the entire chain of activities, it is highly likely that Japanese companies will also be required to take action even outside the adaptation conditions. In this respect, the CSDDD has an influence beyond the scope of European regulation.
2. the negative impact range specified by the CSDDD
The scope of the due diligence response is set out in this Directive with the intention of covering 'upstream to downstream'. 'Chain of activities' is defined as activities upstream to the business partners of a company in the production or provision of goods by the company (upstream), including the development of products or services, and downstream to the business partners of a company in the distribution, transport and storage of products (downstream). Waste treatment and recycling in the terminal area is not included in the scope of application.
Note that for service companies, services performed by downstream groups of companies are excluded from the scope of due diligence application. Incidentally, in the scope of application of the CSDDD, groups of SMEs are explicitly excluded from its scope. However, when they are embedded in a chain of activities, the parent company, the large company, actively promotes the support of these SMEs, which in turn requires the SMEs to respond in a similar way.
As of March 2024, the CSDDD has been adopted as an amendment and is currently in the process of being adapted to national legislation within EU Member States. In other words, it has not yet entered into force and there is still uncertainty as to how it should be implemented in practice. In particular, for companies adapting the CSDDD, it is unclear where and to what extent the chain of activities (the so-called supply chain) should be included in the scope.
It is important to recognise that the scope of due diligence impact envisaged by the CSDDD is broadly set out. At the same time, however, certain considerations are taken into account, such as the exclusion of small and medium-sized enterprises from the scope of application. As the CSDDD is expected to enter into force in three years' time, it is expected that the definition of the scope imposed on adapted companies will be specified in more detail in the future.
3. what happens if the CSDDD is not followed
Member States will be obliged to provide companies with detailed information on their due diligence obligations online through a practical portal, including guidance from the European Commission. They will then incentivise companies to comply by adopting multi-faceted penalties for applicable companies that do not comply with the CSDDD, including
(Authority sanctions) EU countries will impose penalties for non-compliance with the CSDDD, including fines of 'at least 5% of the offending company's worldwide net turnover'. Failure to comply with the fines will be sanctioned with social recognition by publishing the company name of the company in question.
For companies that still do not respond to the fines, injunctions and other measures are expected to be imposed. The specific details have yet to be determined, but the possibility of suspending the distribution, import and export of products has been mentioned.
(Civil liability) At the European level, the CSDDD aims to ensure co-ordinated enforcement of the CSDDD through a network of supervisory authorities. If a company is damaged by these non-compliance measures, it is entitled to compensation for damages. This is imposed on the company as a so-called civil liability.
The envisaged negative affected objects cover a wide range, including trade unions and civil society organisations. A period of five years has been set as the time limit for filing a lawsuit.
It should be noted that the applicable company shall not be liable for damages caused solely by a business partner in the supply chain.
In order to motivate companies to comply with the CSDDD, public authorities will be able to use the CSDDD as part of the criteria for awarding contracts. This will make compliance with this Directive a requirement for many companies, as government and other contracts can also be made conditional on CSDDD compliance.
4. due diligence responses
As identified above, the CSDDD provides companies with the opportunity to improve their corporate governance and integrate human rights and environmental risks and their impact risk management and mitigation processes into their corporate strategy. Specific negative impacts include child labour, forced labour, pollution and deforestation, as well as overuse of water resources and destruction of ecosystems.
Figure 2: Due diligence process
Adapted from OECD (2018), 'OECD Due Diligence Guidance for Responsible Business Conduct'.
The CSDDD explains the process in accordance with the provisions set out by the OECD on due diligence.
Figure 2 refers to the general flow of due diligence.
1) Incorporate responsible corporate behaviour into corporate policies and management systems.
2) Identify and assess negative impacts on the company's operations, supply chain and business relationships
3) Stop, prevent and mitigate negative impacts
(4) Track implementation and results.
5) Communicate how they have dealt with the impact.
middle dot (typographical symbol used between parallel terms, names in katakana, etc.)
middle dot (typographical symbol used between parallel terms, names in katakana, etc.)
[ 2) to 5) repeated if necessary ].
middle dot (typographical symbol used between parallel terms, names in katakana, etc.)
middle dot (typographical symbol used between parallel terms, names in katakana, etc.)
(6) take corrective action where appropriate, or co-operate to correct the situation.
In order to fulfil these obligations, CSDDD-eligible companies will need to make the necessary investments and to provide due diligence guarantees in their contracts with business partners. At the same time as improving their business plans, they also need to provide the necessary support to their small and medium-sized business partners. In these processes, effective engagement, including dialogue and consultation with affected stakeholders, is also an embedded obligation.
It should be noted that under the draft EU Council Directive, if a CSDDD-eligible company is unable to identify, prevent or remedy adverse environmental and human rights impacts caused by a business partner, the company may consider, as a 'last resort', concluding a new deal with such a partner or ending the continuation of an existing deal.
Prior to the interruption or termination of the business relationship, the enterprise does not reasonably anticipate or assess that the adverse effects caused by those end measures will be significantly more severe than the adverse effects that cannot be prevented. If the termination of the business relationship is more adverse, the applicable company is required to continue these relationships and is required to report to the competent authorities.
5. summary.
The CSDDD is a directive that was decided through a long discussion period as of March 2024.The CSDDD requires companies to fulfil their environmental and social responsibilities. Even though its applicable company requirements themselves are detailed, the SME side of the supply chain is also incorporated into the due diligence response. This is a regulation that should be recognised not only by Japanese companies operating in Europe, but also by a wide range of Japanese companies.
At present, there is no practical data on the response of the target companies. This means that it is not clear to what extent the negative impact of due diligence should be reflected. We will continue to follow the latest information on CSDDD and update this information as appropriate.
aiESG offers a service that provides quantitative analysis tools for corporate sustainability indicators. aiESG can be contacted by companies wishing to examine the impact of their activities on the environment and human rights, for example in response to the CSDDD.
Enquiry:
https://aiesg.co.jp/contact/
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[Commentary] Overview and amendments to the European Corporate Sustainability Due Diligence Directive (CSDDD).
https://aiesg.co.jp/report/240426_csddd/
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https://aiesg.co.jp/report/2301226_alphabet-soup/
Commentary] CSRD: The EU version of the Sustainability Reporting Standard just before it comes into force - the impact on Japanese companies.
https://aiesg.co.jp/report/2301120_csrd/
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https://aiesg.co.jp/report/2301222_sfdr/
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https://aiesg.co.jp/report/2301120_csrd/