AdminFeb 7, 2025 2:15:00 PM4 min read | Insights, ESG News

CSDDD – Status Quo & Outlook

On Wednesday, April 24, 2024, a majority of the members of the European Parliament passed the long-awaited Corporate Sustainability Due Diligence Directive (CSDDD) concerning human rights and environmental responsibilities in supply chains. The directive still needs to be finally approved by the Council of the European Union before it can be signed and published in the EU's Official Journal. It will come into effect 20 days after publication. Member states will then have two years to incorporate the new rules into national law.

CSDDD vs. Supply Chain Due Diligence Act (LkSG)

The EU's Corporate Sustainability Due Diligence Directive (CSDDD) and Germany's Supply Chain Due Diligence Act (LkSG) both aim to enhance corporate responsibility for supply chains, particularly concerning human rights and environmental standards. However, there are some significant differences between the two regulations:

Significantly reduced scope: The CSDDD results in a substantial reduction in scope compared to the LkSG. Companies (see table) that do not exceed the established thresholds are exempt from the directive's provisions. This leads to a decrease in the number of affected companies and potentially creates a gap in the protection of human rights and environmental standards. It is expected that around 5,000 companies in the EU will be affected by the CSDDD, including about 1,500 in Germany.
Restrictions on the types of company: The CSDDD limits its scope to specific corporate forms, including public limited companies, partnerships limited by shares, and limited liability companies. Other corporate forms are not directly covered by the regulations, restricting application to a particular group of companies.
Stricter requirements: The CSDDD extends due diligence obligations across the entire activity chain. This means companies can be held liable not only for their direct suppliers but also for suppliers throughout their supply chain. Additionally, a new civil liability clause is introduced for violations of due diligence obligations. Furthermore, the list of protected goods is expanded to ensure a more comprehensive protection of human rights and environmental standards.

The six steps of EU Due Diligence

The due diligence obligations under the EU Supply Chain Directive encompass six steps that align with the OECD Guidelines for Responsible Business Conduct. These steps are designed as a series of measures that companies should take to identify and address potential negative impacts on human rights and the environment in their supply chain.

Integration of Due Diligence into Corporate Policy and Management Systems: Companies should integrate due diligence into their corporate policy and management systems to ensure it is systematically embedded in their business practices.
Identification and Assessment of Adverse Human Rights and Environmental Impacts: Companies are required to identify and assess potential negative impacts on human rights and the environment in their supply chain to recognize and understand risks.
Prevention, Termination, or Minimization of Actual and Potential Adverse Human Rights and Environmental Impacts: Companies must take appropriate measures to prevent, terminate, or minimize actual or potential negative impacts on human rights and the environment.
Evaluation of the Effectiveness of Measures: It is important for companies to regularly evaluate the effectiveness of the measures taken to mitigate risks and make adjustments as necessary.
Communication: Companies should communicate transparently about their due diligence obligations and the measures taken to strengthen stakeholder trust and contribute to accountability.
Provision of Remediation: In the event of actual or potential negative impacts on human rights and the environment, companies should provide appropriate remediation measures to address or compensate for damages and prevent the recurrence of such incidents.

Did you know?

The due diligence obligations under the CSDDD particularly extend to various aspects within a company's supply chain. These include:

The company's own business operations, including all activities directly conducted by it.
Subsidiaries owned or controlled by the company are also included in the scope of due diligence obligations.
Direct suppliers providing goods or services to the company are covered by the due diligence obligations. This includes suppliers of raw materials as well as intermediate products or services.
Indirect suppliers, who may not be directly contracted with the company but still have a significant influence on the supply chain, are also considered.
The use of the product, both during its production and its use by the end consumer, is subject to the company's due diligence obligations.
This comprehensive consideration of various elements of the supply chain aims to identify and mitigate human rights and environmental risks throughout the entire activity chain.

Strengthening legal protections

The CSDDD imposes extensive responsibilities on obligated companies regarding compliance with environmental and human rights standards in their supply chains. Compared to the LkSG, the directive introduces significant enhancements for environmental protection by considering all quantifiable environmental impacts such as soil contamination, water pollution, air emissions, excessive water consumption, and other burdens on natural resources. This marks a significant difference from the LkSG, which has primarily focused on the protection of human rights so far.

The current draft of the CSDDD also addresses the 1.5°C target set in the Paris Climate Agreement. Obligated companies must develop and implement a plan on how they can best contribute to achieving the climate protection goal within the framework of their business model and corporate strategy.