Large EU and non-EU companies now have a corporate due diligence duty to identify and address human rights and environmental impacts across their global chain of activities.

This follows the introduction of the Corporate Sustainability Due Diligence Directive (CSDDD) on 25 July 2024. 

As part of the Directive, large companies must also adopt a climate transition plan, aligned to the 2050 Net Zero target.

What changes should your company be aware of? How could CSDDD affect global value chains? Read on to find out.

Summary

What is the CSDDD?

CSDD is a landmark EU Directive requiring large companies to perform due diligence on environmental and human rights issues throughout their operations, subsidiaries, and value chains.

The main objectives of the Directive are to provide (i) better protection of human rights and the environment and (ii) more transparency and greater trust in businesses.

Sanctions for non-compliance

Failure to comply with CSDDD could result in fines of 5% of the company’s net worldwide turnover.

Individuals affected by breaches of due diligence obligations are allowed to bring civil liability claims.

When will it apply?

CSDDD will be implemented in phases.

The first phase will be implemented in July 2027 and only apply to very large EU and non-EU companies with a turnover over €1.5 billion. The financial thresholds then reduce to €450 million from July 2029.

Does it apply to UK companies?

CSDDD will apply to companies all around the world (including the UK) which meet the turnover criteria or which are part of the value chain of other very large in-scope companies.

Guide to CSDDD

Who does it apply to?

The CSDDD applies to four different types of companies:

*The turnover threshold must have been met in the last two consecutive financial years

Parent companies of a group that reach the above thresholds must also comply with the CSDDD.

Timeline for compliance

The CSDDD will be implemented in phases, starting from the companies with the largest turnover and number of employees:

What will the CSDDD require companies to do?

The CSDDD imposes two main obligations to in-scope companies:

1. Perform due diligence on environmental and human rights issues throughout their operations, subsidiaries and value chains.
2. Adopt a climate transition plan to align their business model to a sustainable economy and with the 1.5°C target in the Paris Agreement.

Due diligence steps

The Directive outlines steps aligned with the OECD Due Diligence Guidance for Responsible Business Conduct, which is a set of internationally recognised guidelines on how businesses should perform due diligence. The following eight steps are required by the CSDDD:

1. Policy: Implement a due diligence policy that details the company’s approach and code of conduct. The policy must be integrated into corporate policies & management systems and updated annually.
2. Identification: Identify actual and potential adverse human rights and environmental impacts from their operations, subsidiaries, and direct and indirect business relationships within their value chain.
3. Cease, prevent and mitigate impacts: Take appropriate measures to cease, prevent or mitigate actual and potential adverse human rights and environmental impacts. The specific measures will depend on whether the impact is caused by the company or an entity within its value chain. Measures could include:
   • Implementing a prevention action plan
   • Obtaining contractual assurances of compliance from business partners
   • Making necessary investments and changes to the company’s business plan
   • Providing support to small and medium-sized enterprises in the value chain
   • Only if necessary, terminating business relationships that cannot be aligned with the main objectives of the CSDDD.
4. Remediation: Carry out remediation for actual adverse impacts. If the impact was caused by a member of the value chain, the company can either carry out the remediation by itself or influence whoever caused the impact to remediate it.
5. Meaningful engagement with stakeholders: Consultation with stakeholders should take place at set stages of the due diligence process. Provide stakeholders with relevant information and, if requested, respond to requests of additional information.
6. Complaints procedure and notification mechanism: Set up a complaints procedure to allow affected individuals and organizations to report adverse impacts.
7. Monitoring: Regularly assess the effectiveness of due diligence measures, at least annually or after significant changes.
8. Public communication: For companies that also need to comply with the Corporate Sustainability Reporting Directive (CSRD), report relevant due diligence information in their annual CSRD-compliant reports. Companies not subject to the CSRD must publish an annual statement on their website.

Due diligence should be carried out with respect to adverse human rights impacts and environmental impacts resulting from the violation of the obligations of the international instruments listed in the Annex of the CSDDD. It’s worth noting that the CSDDD’s definitions of “adverse environmental impact” should also adhere to any national legislation linked to the same concerns. Furthermore, the CSDDD states that its obligations should be interpreted and applied in line with international law and general principles of EU’s environmental law.

Example - PFAS environmental liabilities

An example from the Annex is the Stockholm Convention on Persistent Organic Pollutants, which bans certain types of PFAS “forever chemicals.” There is also an obligation in the Annex regarding the “prohibition of causing any measurable environmental degradation.”

An in-scope CSDDD company should therefore assess if group companies, or business partners manufacture or use PFAS and whether there could be legacy of PFAS contamination at current and former properties. For more information on PFAS  please see our article here.

Climate transition plan

The CSDDD is the first EU law requiring companies to create a climate transition plan. This plan must ensure  that the business model and strategy of the company are compatible with:

1. The transition to a sustainable economy;
2. Limiting global warming to 1.5 °C in line with the Paris Agreement;
3. The objective of achieving climate neutrality as established in the EU Climate Law, including its intermediate and 2050 targets; and
4. Where relevant, address the exposure of the company to activities related to coal, oil and gas.

The transition plan should contain at least:

1. Time bound targets related to climate change based on scientific evidence;
2. A description of key actions to be implemented;
3. Details of the investments and funding required; and
4. A description of the role of the administrative, management and supervisory bodies with regard to the transition plan for climate change mitigation.

This transition plan will require significant operational changes for large in-scope companies.

Companies that report or are included in a transition plan under the CSRD are not required to report a transition plan under the CSDDD.

What are the consequences for non-compliant companies?

The CSDDD requires Member States to appoint independent "supervisory authorities" to ensure compliance with the CSDDD. These authorities are empowered to:

1. Order the companies to cease infringements, refrain from breaching the provisions of the CSDDD again, and provide remediation when appropriate;
2. Impose monetary penalties; and
3. Take interim measures if there's a risk of severe harm.

The fines will be determined by each Member State and should be effective, proportionate, and dissuasive. In any case, the CSDDD has established that a fine’s maximum level should be of no less than 5% of the company’s net worldwide turnover.

Separately, the CSDDD allows any individuals affected by breaches of due diligence obligations to bring civil liability claims against the companies.

What are the implications for global value chains?

The CSDDD applies to business partners in large companies’ chain of activities.

• Upstream business partners relating to the production of goods or the provision of services by the company
• Downstream business partners that carry out distribution, transport and storage activities for the company’s products

The Directive does not cover the disposal of the product, nor the activities of the downstream business partners relating to the services provided by that company.

The CSDDD corporate due diligence duty to identify, prevent, and mitigate adverse human rights and environmental impacts will need to be implemented with business partners throughout the value chain of each company. As a result, businesses operating internationally will need to adapt to ensure compliance across all regions where they operate.

This will increase scrutiny on suppliers, requiring companies to conduct thorough due diligence to ensure they meet the CSDDD’s standards. This may involve more rigorous audits, assessments, and monitoring, necessitating investments in new technologies and systems for effective tracking and reporting.

Moreover, supplier relationships may shift as companies will prioritise working with those who already adhere to high environmental and human rights standards. Local suppliers might be favoured due to easier monitoring and management, encouraging suppliers to improve their practices to remain competitive.

Another significant impact is the potential for increased costs as companies might face higher operational costs due to the need for additional resources, training, and technology to comply with the CSDDD. These costs could be passed down the value chain affecting pricing.

However, the CSDDD will likely drive innovation and collaboration within industries. Companies may seek to develop new, sustainable products and processes to meet the CSDDD’s requirements. This could foster greater collaboration between businesses, suppliers, and other stakeholders to share best practices and develop industry-wide solutions.

In summary, the CSDDD will have far-reaching effects on global value chains. Companies will need to adapt to ensure compliance across all regions where they operate.

How can Irwin Mitchell help with CSDDD?

• Conduct privileged legal due diligence audits on sensitive environmental compliance issues.
• Draft and review contracts and supplier agreements to ensure they align with the CSDDD.
• Provide a robust CSDDD policy and risk management procedures to minimise the risk of legal proceedings related to the CSDDD.
• Introduce you to sustainability consultants and accountancy partners to undertake CSDDD value chain audits, prepare climate transition plans and provide contractual assurances

If you would like to discuss any issues relating to the CSDDD, please contact:

Claire Petricca-Riding

Keith Davidson

Stefano D’Ambrosio