The EU Corporate Sustainability Due Diligence Directive (CSDDD) is the EU’s landmark legislation aimed to address corporate impacts on human rights and the environment. It aims to ensure that companies ‘contribute to sustainable development and the sustainability transition of economies and societies through the identification, and where necessary, prioritisation, prevention and mitigation, bringing to an end, minimisation and remediation of potential or actual adverse human rights and environmental impacts connected with companies’ own operations, operations of their subsidiaries and their business partners in the companies’ chains of activities, and ensuring that those affected by a failure to respect this duty have access to justice and legal remedies’ (preamble (14)). It targets companies with more than 1000 employees and an annual turnover of 450 million euros.
Today, the final compromise text of the CSDDD was approved by the European Parliament marking another key milestone in its adoption by the European Commission following some six years of discussions and negotiations, nine Parliamentary Committees, and over 3000 amendments.
The path to its adoption has been complex, involving negotiations, revisions, and wrangling among stakeholders. The CSDDD represents a significant step towards promoting sustainability and responsible business conduct, but it also raises important questions about enforcement, effectiveness, and global implications.
The CSDDD Adoption Process: A Timeline
In 2018, the European Commission first mooted the possibility of requiring corporate boards to develop and disclose a sustainability strategy that would include due diligence throughout their supply chains. Further to this, the Commission published its study on due diligence requirements through the supply chain in January 2020.
At this point, the majority of stakeholders seemed to be in favour of the adoption of legislation on mandatory human rights and environmental due diligence as it was seen as the regulatory option that would yield the greatest positive social, environmental and human rights impacts. In addition, nearly 70% of companies surveyed anticipated that it would benefit business by providing greater legal certainty, through having one single, harmonized EU-level standard, and that it would level the playing field. In March 2020, the EU Commissioner for Justice, Didier Reynders, committed to table a legislative proposal in this respect and in a resolution adopted in 2020, the EU Parliament called on the European Commission to introduce mandatory due diligence legislation.
On February 23, 2022, the Commission eventually proposed its directive laying down rules on corporate due diligence obligations, directors’ duties, civil liability, and protection of persons reporting breaches. In June 2023, the EU Parliament agreed on its position on a revised version of the CSDDD. On December 14, 2023, the European Council of Europe and the EU Parliament reached a provisional deal on the CSDDD. The agreement fixed the scope of the directive on large companies that had more than 500 employees and a net worldwide turnover over €150 million.
But without going into details of what transpired over the next three months, it is crucial to highlight that the political agreement was then overturned by Germany and Italy, allegedly because of the opposition of the Italian government, sparking a massive surge of support for CSDDD from civil society organizations, academics, and governmental representatives from within the EU and beyond.
Finally, on March 15, 2024, EU authorities approved of the adoption of the latest iteration of the CSDDD. But is the final text fit for purpose?
Changes in Scope
One of the notable changes in the CSDDD’s development has been the narrowing of its scope. Originally targeting EU-companies with over 500 employees and an annual turnover of 150 million euros, the CSDDD now applies to EU-companies with a higher turnover threshold of 450 million euros and with over 1000 employees (which means it is applicable to 0.05% of EU companies). It will also cover non-EU companies with a turnover of €450 million+ generated in the EU market.
While this adjustment aims to focus resources on larger companies with greater economic impact, it raises concerns about excluding a significant portion of large businesses from the scope of the CSDDD. Additionally, the removal of special rules for high-risk sectors, such as textiles, agriculture, and extractives, has diminished the directive’s effectiveness in addressing specific industries prone to human rights and environmental abuses. The shift in scope reflects compromises made during the adoption process, but it also highlights the need for targeted measures to address sector-specific challenges.
Chain of Activities Due Diligence Requirements
A significant aspect of the CSDDD is the reach of the due diligence requirements through companies’ ‘chains of activities’. According to the CSDDD, ‘the chain of activities should cover activities of a company’s upstream business partners related to the production of goods or the provision of services by the company, including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of the products and development of the product or the service, and activities of a company’s downstream business partners related to the distribution, transport and storage of the product, where the business partners carry out those activities for the company or on behalf of the company.’
Companies will be required to undertake due diligence processes that encompass not only their own operations but also those of their subsidiaries and business partners. This expanded scope reflects a growing recognition of the interconnectedness of global supply chains and the need for corporate accountability throughout the entire chain of activities. However, questions remain about the practical implementation and enforcement of these requirements, particularly in complex supply chain networks involving multiple stakeholders and jurisdictions.
But even with this compromised text, what is crucial is how the proposed measures will be implemented in practice. Essential here is the interpretation and application of the principles rather than just the text itself. Central to this is the incorporation of international standards and the inclusion of specific provisions for meaningful stakeholder engagement. This aspect is paramount, particularly when examining the execution of national laws on due diligence.
National Authorities and Enforcement
The empowerment of national authorities to investigate due diligence practices is a critical component of the CSDDD. However, challenges may arise in translating these requirements into effective enforcement mechanisms. Ensuring compliance and holding companies accountable for failures in due diligence processes will require robust enforcement mechanisms and collaboration between national authorities and other stakeholders.
Additionally, questions remain about the allocation of resources, personnel, and capacity-building efforts needed to support effective enforcement at the national level. Stakeholders have called for greater clarity on the roles and responsibilities of national authorities, as well as mechanisms to ensure transparency and accountability in enforcement actions.
Bridging the Gap: From Knowledge to Practice
The adoption of the CSDDD highlights the disparity between knowledge and practice in corporate responsibility. While there is growing recognition of the need for transformative change in business models, many companies still operate within outdated frameworks focused solely on profit maximization. Bridging this gap will require a shift towards responsible business models oriented at creating economic value for the long term, and that prioritize human rights and environmental sustainability by changing approach to the way they distribute economic gains.
This transformation will necessitate not only changes in corporate practices but also shifts in organizational culture, stakeholder engagement, and regulatory frameworks. Stakeholders have emphasized the importance of integrating sustainability considerations into core business strategies and decision-making processes, as well as investing in education and training to build capacity for responsible business practices.
Unlocking the Transformative Potential of the CSDDD
Initially, many companies may perceive the CSDDD solely as a legal exercise, relegating it to their legal or sustainability departments. However, such an approach risks undermining its transformative potential. True transformation necessitates a departure from current unsustainable business models towards those that prioritize value creation while upholding human rights and preserving ecosystems. Encouragingly, there is a growing movement among scholars, practitioners, and businesses committed to this paradigm shift, aiming to generate long-term economic value without compromising ethical principles.
These forward-looking models should be integrated into university and business school curricula, challenging outdated mental models rooted in the past. Just as we wouldn’t use a PC or a car or even TV from the 1970s today, it is illogical to cling to business frameworks conceived in a bygone era. In contemporary academic discourse, the shareholder value maximization model has become obsolete, underscoring the urgent need for the business sector to embrace responsible management practices that transcend simplistic cost-benefit analyses and address sustainability challenges head-on.
Hence, to combat human rights misbehaviour, we need to couple instruments like the CSDDD with new business models. Industrial policies could help promoting these models for instance, using socio-environmental conditionalities to reward more companies that adopt responsible business models and to penalize companies that fail to do so. We also need a stronger control and rule of laws from countries.
Conclusion
As the CSDDD nears its final adoption, it is essential to acknowledge both its potential and its limitations. While the Directive represents a pivotal step towards corporate accountability, challenges remain in translating its principles into meaningful action. Addressing these challenges will require ongoing collaboration between policymakers, businesses, civil society, and other stakeholders to ensure that the CSDDD achieves its intended goals of promoting sustainable and responsible business practices.
By learning from the experiences of the CSDDD adoption process, stakeholders can work together to overcome barriers and build a more equitable and sustainable future. The journey towards corporate sustainability is ongoing, and the CSDDD represents an important milestone in this journey, but much work remains to be done to realize its full potential and impact.
