The far-reaching impact of the New EU's Corporate Sustainability Due Diligence Directive (CSDDD)

The European Union's (EU) commitment to sustainability has and is constantly reshaping the EU corporate and business landscape, placing Environmental, Social, and Governance (ESG) at the forefront of regulatory compliance and corporate governance both in public and private sector. While several directives are driving this transformation, the recently published -Corporate Sustainability Due Diligence Directive (CSDDD or CSD3) stands out for its far-reaching implications. This directive, officially published on July 5, 2024 as EU 2024/1760 and it represents a seismic shift in how businesses must approach their operations, not just within the EU, but globally for operating in EU.

The CSDDD is more than just another regulatory requirement; it is a comprehensive framework that mandates businesses to embed sustainability into every aspect of their corporate strategy and operations. Unlike the Corporate Sustainability Reporting Directive (CSRD), which focuses on transparency and reporting, the CSDDD goes deeper, requiring companies to actively manage and mitigate the environmental and human rights impacts of their activities.

For businesses operating in the EU, the CSDDD sets out eight (8) key requirements that must be integrated into corporate policies and risk management systems. These include identifying and assessing actual or potential adverse impacts, preventing and mitigating these impacts, providing remediation where necessary, and conducting meaningful stakeholder engagement. Additionally, companies must establish and maintain a notification mechanism, monitor the effectiveness of their due diligence policies, and publicly communicate on their due diligence efforts.

The directive’s scope is extensive. It applies not only to a company's operations but also to its subsidiaries and business partners worldwide. This global reach means that even companies outside the EU, particularly those in the supply chains of EU-based businesses, will be impacted. Compliance with the CSDDD will likely become a prerequisite for doing business with EU companies, as these organisations will require their suppliers to adhere to the CSDDD standards and may conduct audits to ensure compliance.

The timeline for implementing the CSDDD for businesses is crucial for their operations. Larger companies (subject to Member States status) fall within the CSDDD scope starting in 2027, with smaller businesses following over a three-year period. However, given the extensive changes required, companies should not delay in preparing for these new obligations. Those who fail to comply face significant penalties, including fines of up to 5% of their net worldwide turnover, exclusion from public contracts, and potential civil liability for damages caused by non-compliance.

What sets the CSDDD apart from other directives related to sustainability obligations is its focus on proactive risk management and accountability. By requiring companies to integrate human rights and environmental due diligence into their corporate strategy, the CSDDD ensures that sustainability is not just an afterthought but a core business priority. The directive also aligns with global climate goals, requiring companies to ensure their strategies are compatible with the Paris Agreement’s target of limiting global warming to 1.5°C.

Alignment of CSRD & CSDDD

For companies already navigating the CSRD, there is a silver lining: the CSDDD's communication obligations align with the CSRD's reporting requirements. This means that businesses compliant with the CSRD may already be on the right track to meeting some of the CSDDD's demands, particularly in terms of public communication on due diligence efforts.

However, the CSDDD is not just about compliance; it is an opportunity for companies to enhance their risk management processes, improve stakeholder trust, and gain a competitive edge in a market increasingly driven by sustainability. By adopting the CSDDD’s requirements, businesses can position themselves as leaders in responsible business practices, better prepared for the challenges of the future.

The CSDDD represents a significant evolution in EU Sustainability Regulations, with profound implications for businesses worldwide. Companies must consider immediate action to understand and implement the directive’s requirements, ensuring they are not only compliant but also competitive in an increasingly sustainability-focused market. The CSDDD is a clear signal that the era of voluntary ESG practices is over; it is now a matter of regulatory obligation, with real consequences for those who fail to adapt.

By Nicole K. Phinopoulou, Lawyer, Banking & Financial Services, ESG & Sustainable Finance Expert, Regulatory Compliance, LL. B (Hons), LL.M(UCL), LPC, CISL, University of Cambridge