AdminAug 27, 2024 11:52:14 AM4 min read | Insights, ESG News

CSDDD – Status Quo & Outlook

On Wednesday, April 24 2024 a majority of Members of the European Parliament adopted the long-awaited Directive on corporate due diligence with regard to human rights and the environment in value chains (CSDDD).

The Directive must now be finally approved by the Council of the European Union before it is signed and published in the Official Journal of the EU. It will come into force 20 days after publication. The member states then have two years to transpose the new rules into national law.

CSDDD vs. Supply Chain Act

The EU's Corporate Sustainability Due Diligence Directive (CSDDD) and the German Supply Chain Act both aim to strengthen the responsibility of companies for their supply chains, particularly with regard to human rights and environmental standards. However, there are some significant differences between the two regulations:

Significantly reduced area of application:

The CSDDD leads to a significant reduction in the scope of application compared to the supply chain act. Companies (see table) that do not exceed the specified thresholds are exempt from the provisions of the directive. This leads to a reduction in the number of companies affected and can potentially lead to 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 around 1,500 in Germany

Restrictions on the types of company:

The CSDDD limits the scope of application to certain types of companies, including stock corporations, partnerships limited by shares and limited liability companies. Other types of companies are not directly covered by the regulations, which leads to a restriction of application to a certain group of companies.

Stricter requirements:

The CSDDD provides for an extension of due diligence obligations to the entire chain of activity. This means that companies can be held liable not only for their direct suppliers, but also for suppliers in their supply chain. In addition, a new civil liability offense is introduced for the violation of due diligence obligations. Furthermore, the list of protected goods will be expanded to ensure more comprehensive protection of human rights and environmental standards.

The six steps of the EU duty of care

The due diligence obligations under the EU Supply Chain Directive comprise six steps that correspond to the OECD Guidelines for Responsible Business Conduct. These steps are designed as a series of actions 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 obligations into corporate policies and management systems:
Companies should integrate due diligence obligations into their corporate policies and management systems to ensure that they are systematically embedded in their business practices.
Identify and assess adverse human rights and environmental impacts:
It is necessary for companies to identify and assess the potential adverse human rights and environmental impacts in their supply chain in order to recognize and understand risks.
Preventing, ending or minimizing actual and potential adverse human rights and environmental impacts:
Companies must take appropriate measures to prevent, end or minimize actual or potential adverse human rights and environmental impacts.
Evaluate the effectiveness of the measures:
It is important that companies regularly assess the effectiveness of the measures taken to mitigate risks and make adjustments where necessary.
Communication:
Companies should communicate transparently about their due diligence obligations and the measures taken in order to strengthen stakeholder trust and contribute to accountability.
Provision of remediation:
In the event of actual or potential adverse impacts on human rights and the environment, companies should provide appropriate remediation to address or compensate for harm and prevent the recurrence of such incidents.

Did you know?

The due diligence obligations under the CSDDD extend in particular to various aspects within a company's supply chain. These include, among others :

The company's own business activities, including all activities carried out directly by the company.
Subsidiaries owned or controlled by the company are also included in the scope of the due diligence obligations.
Direct suppliers that provide 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 are not directly contractually linked to the company, but who nevertheless have a significant influence on the supply chain, are also included.
The use of the product, both during its manufacture and during 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 is intended to help identify and mitigate human rights and environmental risks along the entire chain of activity.

Aggravation of legal interests

The CSDDD imposes far-reaching responsibilities on obligated companies with regard to compliance with environmental and human rights standards in their supply chains. Compared to the supply chain act, the directive introduces significantly stricter environmental protection requirements by taking into account all quantifiable environmental impacts such as soil contamination, water pollution, air emissions, excessive water consumption and other impacts on natural resources. This represents a significant difference to the supply chain act, which has so far mainly focused on the protection of human rights.

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