Corporate Sustainability Due Diligence Directive: Moving away from random ESG practices

Corporate Europe is entering a new era with the recently proposed Corporate Sustainability Due Diligence Directive (CSDDD). The new Directive of the European Union (EU), that eventually will be transposed by all Member-States, aims to endorse greater corporate responsibility, improve sustainability due diligence standards and corporate governance of human rights, and aid stakeholders' rights to access remedies.

The EU explains that the aim of this Directive is to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules will ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe.

In other words, the purpose of the Directive is to establish a corporate due diligence duty on embracing sustainability criteria factors. With the adoption of the CSDDD companies will be obliged to identify, prevent, mitigate or even bring to an end, operations that negatively affect human rights or impact the environment. Larger size companies need to present and implement a plan aligned with the target of limiting global warming to 1.5 °C, in line with the Paris Agreement (2016).

The importance for Cyprus

As Cyprus is evolving into a regional destination for international companies, especially technology oriented, the CSDDD becomes increasingly important. The proposed Directive will have significant influence upon non-EU firms exporting goods throughout the EU or those linked to those within the EU.

EU and Cypriot firms need to understand that with the CSDDD just saying about their ESG performance will not be enough. Entities will have to report in detail what they practically do to incorporate ESG criteria in their everyday line of business and operations.

Once the Directive is adopted, it will, primarily, apply to large limited liability companies with 500+ employees and a net turnover over €150 million worldwide. Two years after the new rules start applying, they will be extended to other limited liability companies with 250+ employees and a net turnover over €40 million worldwide, in sectors where a high-risk of human rights violations or harm to the environment has been identified, e.g. in agriculture, textiles or minerals. As noted above the scope of the Directive is to also apply to non-EU companies active in the EU with a turnover threshold aligned with the above, generated in the EU.

SMEs do not fall directly under the scope of the Directive. Nevertheless, they might be indirectly affected by the new rules as a result of the effect of large companies' actions across their value chains. Therefore, the proposal foresees specific support addressed to SMEs, such as guidance and other tools to help them gradually integrate sustainability considerations in their business operations. Member States shall provide further technical support, and may provide financial support to SMEs to facilitate adaptation. The proposal will also contain elements to protect SMEs from excessive requirements from large companies.

According to the specific Q&A session prepared by the EU, the Directive will require the companies within its scope to:

• Integrate due diligence into policies.
• Identify actual or potential adverse human rights and environmental impacts.
• Prevent or mitigate potential impacts.
• Bring to an end or minimise actual impacts.
• Establish and maintain a complaints procedure.
• Monitor the effectiveness of the due diligence policy and measures.
• Publicly communicate on due diligence.
• In order to achieve a meaningful contribution to the sustainability transition, due diligence under this Directive should be carried out with respect to all adverse human rights and environmental impacts identified therein.

CSDDD anticipates to assist companies to identify, assess, and manage the potential risks and opportunities related to ESG issues that may affect their financial performance, reputation, and long-term sustainability. The implementation of the Directive will be critical for managing risk, complying with regulations, meeting investor expectations, protecting brand reputation, and ensuring long-term sustainability.

Nicole K. Phinopoulou, Lawyer, Banking, Corporate Commercial & Financial Services, LL. B(Hons), LL.M(UCL), LPC, CISL, University of Cambridge