EU’s CSDDD: Commemorating a new era of mandatory due diligence and corporate responsibility.

Despite the dubious fate, and tumultuous history of the Corporate Sustainability Due Diligence Directive (CSDDD), the Legal Affairs Committee of the European Parliament approved the historic legislation last month, which lays down obligations for companies to address actual and potential adverse impacts on human rights and the environment in their operations. Industry watchdogs, however, pointed out that the watered-down version of the original proposal falls short of holding corporations accountable. The original proposal covered within its scope companies having 500 employees and an annual turnover of EUR 150 million; however, this threshold has been significantly raised to include only those companies with over 1000 employees and a turnover of EUR 450 million. This change means only extremely large companies will be covered by the mandate of the CSDDD. Experts have estimated that these changes will severely reduce the scope of the legislation, and the total number of companies covered by the CSDDD is now approximately 5,500, from its original 16,000. Activities such as product disposal, dismantling and recycling are no longer subject to due diligence requirements and have also been left out of the scope of the legislation. However, focusing on the reduced scope of the CSDDD misses the pivotal takeaway that the legislation is a first of its kind that sets out legal expectations that companies are expected not to harm human rights through its operations, and address any adverse impacts on human rights. The legislation also aligns with international standards on human rights and responsible business conduct such as the United Nations Guiding Principles on Business and Human Rights (UNGPs) and OECD Guidelines for Multinational Enterprises.

Multinational companies covered will have to rethink and redesign their risk management procedures to comply with the requirements set out in the CSDDD. Not only will companies have to identify and address human rights risks in their operations but also those arising from their subsidiaries and suppliers. Companies falling within the scope will need to conduct human rights due diligence (HRDD) across their supply chain, which is typically made up of smaller companies. Therefore, despite being limited in its scope, the CSDDD will influence small and medium enterprises due to companies' supply chains being subject to regulation. Companies can no longer turn a blind eye to the impact of their supply chain on human rights and the environment. The CSDDD also proposes to bring increased transparency across the value chain. Companies will need to get a comprehensive understanding of their suppliers' practices and will have to engage with suppliers to persuade them to set standards for transparency around human rights and environmental risks. Improved risk management is another attribute the CSDDD seeks to embed within supply chains. Companies with most of their suppliers outside the EU will have to undertake increased engagement in identifying and addressing adverse impacts.

Significantly, despite being reduced in scope, the legislation advances a uniform and harmonized approach to HRDD standards. The rejection of the CSDDD posed the risk of countries in the EU adopting different standards, which could lead to a fragmented HRDD landscape. With one legislation regulating the EU market, there is greater clarity on companies’ duties and obligations. Moreover, the impact this legislation will have on protecting workers and communities' rights is undeniable. Increased risk management, and greater transparency in supply chains could significantly contribute to better working conditions for rightsholders. The new era of mandatory due diligence being ushered in by the CSDDD is certainly a noteworthy step towards corporate responsibility. We call on EU member states for the effective, and ready implementation of this law to ensure that legislative requirements translate into long-lasting and sustainable changes for workers in supply chains.