Governance Corporate sustainability ESG Human rights: Time for Corporates to get ready for the Sustainability Due Diligence EU Directive

The European Directive for Corporate Sustainability Due Diligence ("CSDDD") on the due diligence obligation in supply chains will have a direct impact on European member states supply chain laws and regulations environment.

Companies' behavior ?across all sectors of the economy?is indeed a key driver to the?EU?transition?towards a?climate-neutral?economy?in line with the European Green Deal??and?the UN Sustainable Development Goals, human rights- and environment-related objectives.?This?requires?mitigation processes?for?adverse?human rights?and environmental impacts in their?value?chains, integrating sustainability into corporate governance and management systems,?and?framing business?decisions?in terms of?human rights, climate?and?environmental impact.

The European Commission's CSDDD initial draft, after the EU Parliament Wolters Report, and the recent official European Council negotiation position on the CSDDD, signpost that the key orientations taken and new obligations resulting from these choices will soon be enacted.

?Notwithstanding CSDDD draft still has to go thru finalization between the Council presidency and the European Parliament, we recommend corporates start timely their preparation mapping review and risk assessment of potential adverse impacts resulting from their business relations that might engage their liability and may lead to brand and reputation damage or to financial penalties.?

The CSDDD Council's General Approach defines the application thresholds to date:

For EU companies:?

- worldwide turnover superior to EUR 150 million and over 500 employees or

- In high-risk sectors, metals and mineral extraction, textiles, agriculture, food, a turnover of EUR 40 million with EUR 20 million in a high-risk sector, and over 250 employees.

For Non-EU companies:

Irrespective of number of employees,

·????????Over EUR 150 million turnover in the European Union,

·????????Over EUR 40 million - and-under EUR 150 million in the European Union, with EUR 20 million in a high-risk sector

• The number of employees and net worldwide turnover threshold should be met for two consecutive financial years consistent with the EU Corporate Sustainability Reporting Directive (CSRD). (see AXIANTIS related Alert)
• As to non-EU companies, the EU Council's position requires the Commission to set up a global secured data exchange system for tracking non-EU companies’ turnover in the EU.

The Councils proposes a progressive ramp up:

A first three years enforcement for companies over 1,000 employees and EUR 300 million turnover, and, for non-EU companies, EUR 300 million net turnover in the EU.

High-risk sectors, global turnover and employees number thresholds of CSDDD should be revised after a first seven years application period.

?

The Council's introduces a new concept of "chain of activities" that covers

(i) a company's upstream business partners activity relating to the production of goods or the provision of services;

(ii) a company's downstream business partners activity relating to the distribution, transport, storage and disposal of product,

·????????including dismantling, recycling, composting and landfilling,

·????????excluding product disposal by consumers, distribution, transport, storage and product disposal subject to EU export control;

The Council's leaves to each Member State to choose or not to include financial services when transposing the CSDDD:

For Member States applying CSDDD to financial services provision, all regulated financial undertakings shall be required to identify the potential adverse impact of their business partners operations (limited to the period before financial services effective provision).

An extension of the due diligence obligation to a Group parent company is also introduced: The option to fulfil the due diligence obligations at the group level shall be limited to parent companies and subsidiaries falling in the scope of the CSDDD thresholds.

Risk-based mapping and in-depth assessment of adverse impacts duties are augmented by a new obligation of prioritization of adverse impacts based on criteria of severity and likelihood of occurrence.

?The Council also introduces an element of pertinence and accuracy evaluation of corporates in the way they enact appropriate measures to prevent or mitigate potential adverse impacts and/or bring actual adverse impacts to an end.

?Corporates would have an option to withhold from terminating a business relationship if a reasonable expectation exists that termination would result in a worse adverse impact than the potentially adverse impact that can’t be prevented or adequately mitigated. Similarly, relationships could be upheld when no available alternative of continued provision of necessary raw material, product or service essential to the company's production of goods or services and whereas such termination might cause substantial prejudice to the company.

Consistently with the European Corporate Sustainability Reporting Directive ("CSRD") in application since January 2023 (see AXIANTIS Alert) the Council's creates an obligation for corporates as legal persons to deploy and run action plans required to enable the fulfilment of CSDDD due diligence obligations.

?A fault by intention or negligence element requirement is introduced to induce civil liability of natural or legal persons wherever the corporate intentionally or negligently fails to comply with its due diligence obligations; or, a prejudice to the natural or legal person's interests results from its failure to comply with due diligence obligations.

When the prejudice results jointly from the corporate and its subsidiary or business partner, a joint liability might be engaged, including when a due diligence obligation was inaccurately or insufficiently conducted by the parent corporate on behalf of its subsidiary.

AXIANTIS Governance Risk and Compliance Partners team.