The EU Corporate Sustainability Due Diligence Directive (CSDDD): A Game Changer for Global Supply Chains

The European Union (EU) is pushing the boundaries of corporate accountability with the introduction of the Corporate Sustainability Due Diligence Directive (CSDDD). This groundbreaking legislation aims to ensure that companies operating within the EU, and those with significant connections to the EU market, take responsibility for the environmental and human rights impacts throughout their global supply chains. While the directive primarily targets EU companies, its reach extends far beyond European borders, impacting companies worldwide. This article explores the core principles of the CSDDD and how it will reshape the business landscape for non-EU companies.

Unveiling the Core Principles of the CSDDD

The CSDDD establishes a mandatory framework for companies to identify, prevent, mitigate, and address potential human rights abuses and environmental harm within their operations and value chains. This translates to a series of key principles:

• Duty of Care: Companies will be obligated to conduct due diligence throughout their supply chains, assessing potential and actual negative impacts on human rights and the environment.
• Risk Management: A robust risk management system is crucial. Companies need to identify areas of high risk and implement appropriate measures to address them.
• Transparency and Reporting: Regular reporting on due diligence processes, identified risks, and actions taken is mandatory. This allows for stakeholders to hold companies accountable.
• Remediation: Companies are responsible for taking steps to remedy any human rights abuses or environmental damage caused by their operations or those within their supply chains.

Timelime

The proposal for the CSDDD was adopted by the European Commission in February 2022. Negotiations on the final text continued throughout 2023 and early 2024. The European Parliament adopted the text in April 2024, and should be followed by a formal adoption by the Council. Once adopted, member states will have two years to transpose the directive into their national laws.

The directive envisions a phased implementation, starting with the largest companies reporting on their 2027 human rights and environmental impacts in January 2028.

Implementation timeline & Thresholds for in-scope companies

Beyond Borders: How the CSDDD Affects Non-EU Companies

While the CSDDD directly applies to EU-registered companies and those exceeding specific turnover thresholds within the EU, its impact extends outwards. Here's how companies that are not in scope of the CSDDD, including non-EU companies, can still expect to be affected:

• Supply Chain Pressure: In scope companies will be obligated to ensure their suppliers, regardless of location, comply with the CSDDD's due diligence requirements. This will likely create a ripple effect, pressuring non-EU companies to adopt similar practices to remain competitive in the EU market.
• Reputational Risk: Consumers and investors are increasingly focused on sustainability and responsible sourcing. Non-EU companies failing to demonstrate compliance with the principles outlined in the CSDDD risk reputational damage and potential consumer boycotts on EU markets.
• Level Playing Field: The CSDDD aims to create a level playing field for businesses operating within the EU. Non-EU companies that already have robust sustainability practices might benefit as they are well-positioned to meet the expectations of EU partners.
• Increased Scrutiny: Non-EU companies with significant business ties to the EU can expect increased scrutiny from regulators and stakeholders regarding their environmental and human rights practices.

With fines for non-compliance that could reach up to 5% of their global turnover, it is likely that companies in scope will take this directive seriously and apply a strong pressure on their suppliers to comply with the new due diligence requirements.

The Ripple Effect: How Non-EU Suppliers Can Take Action

The CSDDD, while not directly targeting non-EU companies outside the scope, creates a powerful ripple effect. Here's how non-EU companies can navigate this new landscape:

• Proactive Engagement: Don't wait for your EU partners to initiate contact. Proactively engage with your EU customers and understand their evolving expectations regarding sustainability practices.
• Building Transparency: Enhance transparency within your own operations. Invest in systems to track your environmental impact and labor practices throughout your supply chain.
• Sustainability Certifications: Consider pursuing sustainability certifications that demonstrate your commitment to responsible sourcing. This can enhance your credibility with EU partners.
• Collaboration is Key: Collaboration throughout the supply chain is crucial. Work with your suppliers to implement responsible practices and encourage them to do the same with their own suppliers.

A Look Ahead: Challenges and a Sustainable Future

The CSDDD presents both challenges and opportunities. Some challenges include the complexities of mapping global supply chains and ensuring effective enforcement mechanisms across various jurisdictions.? However, the directive's potential to drive positive change is undeniable. By requiring greater transparency and accountability, the CSDDD can lead to a more sustainable global economy.

This article was written by ASUENE Compass. For more insights about the CSDDD, keep an eye out for our upcoming white paper on EU sustainability regulations and their impact on non-EU companies.