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

The European Corporate Sustainability Due Diligence Directive (CSDDD) is a regulation that requires large companies, primarily those doing business in Europe, to conduct due diligence on the negative impacts of their business activities on both human rights and the environment. The CSDDD (Corporate Sustainability Due Diligence Directive) is a regulation that requires large companies, mainly those doing business in Europe, to conduct due diligence (due diligence procedures) on the negative impacts of their activities on both human rights and the environment.

On March 15, 2024, the European Council approved the final text of the CSDDD, which was first proposed by the European Commission in February 2022 and has been the subject of intensive negotiations and substantial compromise between the European Council and the European Parliament. The CSDDD, which has undergone 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 paper summarizes the comprehensive review, discussion, and revision of the Directive as it took its current form, and then provides an overview of the Regulations themselves.

1. discussion of CSDDD

Since the formulation of the Guiding Principles on Business and Human Rights at the United Nations in March 2011, the EU has been seeking to centralize rules on sustainability due diligence. As such, the recently approved CSDDD can be said to aim for common rules among European member states, enabling efficient compliance operations on a regional basis, and contributing 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 companies to properly integrate due diligence into their corporate systems with regard to adverse environmental and human rights impacts, including the description of their "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 aligned with the Paris Agreement goal of limiting temperature increase to 1.5°C or less.

The scope of issues that companies must discuss through the CSDDD is wide-ranging, and can be simply described as environmental and human rights issues related to the "upstream to downstream" aspects of their business. Companies will be obliged to "identify, assess, prevent, mitigate, address, and remediate" (due diligence) not only human impacts but also global environmental impacts such as child labor, slavery, pollution, spills, and damage to ecosystems.

However, the Directive, which was scheduled 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 excessive regulations and bureaucracy imposed by the EU would reduce corporate competitiveness in the midst of a prolonged economic downturn. In particular, they expressed their opposition to the CSDDD proposal's approach of imposing an obligation to conduct human rights and environmental due diligence even on indirectly affiliated companies compared to German domestic law and the obligation of these indirectly affiliated companies to assume the responsibilities of the companies under the CSDDD.

Dissenting opinions are mainly based onEligibility Requirements for Eligible Companies."and"Developing a Scope for Conducting Due Diligence."in additionClimate Change Transition Plan."The report requests revisions to the following information. The next section summarizes the significant revisions as of March 2023.

2. a rough summary of the revised content

I. eligibility requirements for applicable firms."

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

Non-EU companies (third country companies)
- Group 3: Companies with revenues exceeding 150 million euros in the most recent fiscal year
- Group 4: Companies with revenues exceeding EUR 40 million in the most recent fiscal year and more than 50% of global revenues generated by high-risk sectors

(After correction)
Companies in the EU(Deleted provisions for high-risk projects):
　- Average number of employees exceeds 1,000
　and
　- Worldwide net sales exceed 450 million euros

The reporting obligation is imposed on the ultimate parent company, unless the primary 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 sales in the EU of more than EUR 450 million in the most recent fiscal year
　- The company that is the ultimate parent company of the group that falls under the above in consolidation

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

(Prerequisite.)
Companies with net sales in the EU of more than €450 million in the most recent fiscal year & companies that are the ultimate parent company of a group that falls within the above categories on a consolidated basis.

　1. companies with net sales exceeding EUR 1.5 billion in the previous year: applicable after 3 years of the Directive's entry into force
　2. companies with net sales exceeding EUR 900 million in the previous year: applicable four years after the entry into force of the Directive
　Companies other than those listed above that meet the prerequisites: Apply 5 years after the Directive enters into force.

Considering that the CSDDD was approved as of March 2024, some Japanese companies doing business in the EU will need to comply with this regulation starting in 2027.

II. "Developing the Scope of Conducting Due Diligence"

(Before correction)
- The Company and its subsidiaries
- All business partners upstream and downstream
(Within the scope of conducting due diligence on all business processes, excluding disposal by consumers)

(After correction)
- The Company and its subsidiaries
- All business partners upstream and downstream
(Downstream product recycling, disposal, etc. were added as not covered.)

III. The "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
- Introduced financial incentives for directors and management to implement the plan.

(After correction)
- Develop and implement a climate change transition plan suitable for the 1.5°C target of the Paris Agreement
– Introduction of monetary incentive provision deleted.

3. summary

The revised text confirms that there has been some discussion about the scope of the CSDDD, which should be applied while preserving its essence. Since the Directive acts as a supranational law within Europe, each European country is required to enact national legislation in line with the CSDDD rules.

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

In the next issue, we will review the more detailed contents of this Directive and then summarize the future of sustainability reporting in the European region.

aiESG, Inc. is developing 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.

Contact us:
https://aiesg.co.jp/contact/

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