The European Parliament is working on the Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937 (CSDD), which requires large companies operating in the European Union to identify, assess and manage negative environmental and social impacts.
What changes should be expected?
To date, companies have either not included risk management processes for respecting human rights and reducing negative environmental impacts in their strategies, or have relied on voluntary declarations regarding human rights and environmental protection, which have proven insufficiently effective.
The CSDD is therefore intended to contribute to unifying and increasing the effectiveness of existing practices in this regard. The proposed changes also aim to extend corporate responsibility to supply chains, which is expected by consumers and investors. Implementation of the CSDD is also expected to eliminate inconsistencies in due diligence requirements and ensure legal certainty in the liability of companies operating in the European market.
Companies falling under the provisions of the Directive
According to the European Parliament amendments of 1 June 2023, the addressees of the CSDD are to be EU companies if they meet one of the following conditions:
(a) the company had more than 500 employees on average and had a net worldwide turnover of more than EUR 150 million in the last financial year for which annual financial statements have been prepared;
(b) the company did not reach the thresholds under point (a), but had more than 250 employees on average and had a net worldwide turnover of more than EUR 40 million in the last financial year for which annual financial statements have been prepared.
The CSDD will also apply to non-EU companies that meet one of the following conditions:
(a) the company had a worldwide turnover of more than EUR 50 million, provided that at least EUR 40 million was earned in the Union in the last financial year preceding the most recent financial year, taking into account the turnover earned by third-party companies with which the company or its subsidiaries have entered into a vertical agreement in the Union in exchange for royalties;
(b) the company did not meet the above thresholds, but is the ultimate parent of a group that had 500 employees and had worldwide turnover of more than EUR 150 million, and at least EUR 40 million was earned in the Union in the most recent financial year for which annual financial statements were prepared, taking into account revenues generated by third-party companies with which the company or its subsidiaries have entered into a vertical agreement in the Union in exchange for royalties .
The definition of a value chain
To get a good understanding of what the proposed directive is about and the comprehensiveness of the new requirements, it’s worth looking at the definition of “value chain”. According to the CSDD the value chain is to consists of all activities, resources and relationships related to the business model and external environment in which an entity operates – undertaken and used by a company, from the concept of creating a product or service to the management of the associated waste. Only waste management by individual consumers is to be excluded from this definition.
Obligations for companies
The goals of the CSDD are to be achieved by businesses fulfilling certain obligations such as:
(a) implementation of a due diligence policy, which will include, among other things, a description of potential or actual adverse impacts identified by the company or a description of the company’s due diligence approach, a code of conduct and a description of existing procedures and measures put in place to implement due diligence in the value chain;
(b) implementation of measures to assess the magnitude of the impact of the company’s operations, subsidiaries and business relationships to identify and assess actual or potential adverse human rights impacts and adverse environmental impacts resulting from its own operations, products and services, or from the operations, products and services of its subsidiaries and the operations, products and services of its value chains, and whether they cause or are directly related to these impacts;
(c) implementation of measures to avoid or, if avoidance is impossible or not immediately possible or has failed, adequately mitigate potential adverse human rights and environmental impacts;
(d) refraining from entering into new relationships or expanding existing relationships with a partner with whom or whose value chain the adverse effect is associated.
Sanctions for non-compliance
The CSDD requires member countries to establish sanctions for violations of national laws, which include fines, the possibility of requiring an entrepreneur to make a public statement regarding the violation, an obligation to cease certain activities, or suspension of the release of products for marketing or export.
Directive’s pros and cons
Companies operating within the European Union will have to review their operating models and identify their value chains. The proposed directive will bring with it bureaucratic obligations to prepare policies and processes for selecting suppliers or conducting audits. Businesses will be required to disclose annual reports, which will need to show that their supply chain was indeed subject to verification.
Despite these difficulties, however, it seems that this will have a positive impact on the conduct of business by entrepreneurs in general. Ethical behaviour affects the competitiveness of entities, consumer choices and decisions, the image of companies and, as a result, their reputation as well.