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The 'due diligence law'; time for companies to put on their green glasses

What does the Corporate Sustainability Due Diligence Directive (CSDDD) really mean? What does it entail and what is expected of companies and subsidiaries of large chains?

The CSDDD requires major brands and companies to report on their environmental performance, social responsibility and how the company is governed based on sustainability (ESG for short) for the first time. This directive aims to ensure that large companies take responsibility for improving  the conditions for people, the environment and nature throughout the value chain.

Companies (and subsidiaries) covered by the CSDDD must account for their activities and the harm they cause to people and the environment. They also have to identify, prevent, mitigate or eliminate negative impacts associated with their activities. These include preventing slavery, child labor and environmental pollution. In short, companies must take appropriate measures to prevent and, if necessary, address negative impacts.

What does the CSDDD expect from companies and which companies does it apply to?

The CSDDD applies to companies that meet the following criteria:

  • In 2027, companies with more than 5,000 employees and a turnover of 1.5 billion euros must comply with the CSDDD.

  • In 2028, it will apply to companies with more than 3,000 employees and 900 million euros in turnover.

  • From 2029, companies with more than 1,000 employees and a turnover of 450 million euros must comply with the CSDDD.

Covered companies, as well as smaller companies that fall within the value chain, are required to:

·         Integrate value chain due diligence into their corporate policies and risk management systems.

  • Identify actual or potential adverse human rights and environmental impacts, assess them and take measures to prevent, mitigate or eliminate them.

  • Achieve meaningful stakeholder engagement to promote the  identification of (potential) environmental and human rights impacts and develop due diligence policies.

  • Identify operations of their subsidiaries and, if related to their chain of activities, of their business partners. This will help determine where negative impacts are likely to occur and be most severe.

  • Establish and maintain a notification system and complaint procedures and take action where actual negative impacts are identified.

  • Monitor the effectiveness of measures taken.

  • Ensure compliance with the 1.5°C climate target and prepare a transition plan in line with EU-targets for emission reduction.

Reporting requirements and sanctions

The CSDDD requires companies to prepare a transition plan to ensure they meet the climate target. The transition plan should ensure that the company's strategy is in line with the Paris Climate Agreement. Member states agree to transition to a sustainable economy and limit global warming to no more than 1.5°C. A variable compensation of the director should encourage the achievement of the targets in companies with more than 1,000 employees. The transition plan should include at least the following:

-          Specific goals and measures that will lead the company's value chain to climate neutrality by 2050, in five-year increments starting in 2030;

-          In addition, the CSDDD will require compliance with efforts related to the climate transition plan.

Companies covered by the CSDDD will have to comply with the stated requirements. Whereas the CSRD was only about reporting, the CSDDD requires companies to actually take action.

Companies that fail to comply with the CSDDD regulations can be sanctioned by a national regulator. This can range from "naming and shaming" to having certain products taken off the market or even a fine of at least 5% of global net sales! It also has a downside for non-EU companies; they can be excluded from public tenders in the EU.

SME’s beware!

Although SME’s do not directly meet the criteria of the directive, they may still be impacted because they are part of chains and often supply large companies that are subject to the CSDDD. Because large companies have reporting requirements, subsidiaries are also required to comply with the CSDDD.

Get a head start

It is wise to start preparing for the CSDDD well in advance. Compare your current situation with the requirements of the CSDDD. This way you can find out what sustainability information you already have and which requirements are still missing. Together with your stakeholders, map the value chain and identify what is important to them.

Next, you need to develop a human rights and environmental policy. It is also important to review or terminate existing contracts with business partners. Once you have a good picture of the situation and value chain, it is important to identify actual and potential negative impacts and to end or reduce these violations. Conducting continuous due diligence is necessary to do this.

Finally, you need to prepare a transition report; this report will provide you with insight into "where your company stands.”

What about companies outside the EU?

Companies with more than €450 million net turnover in the EU also have to deal with the CSDDD. For example, when a company has entered into franchise or license agreements with parties in the EU or when they are the ultimate parent company of a group. These companies also fall within the scope.


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