The EU CSDDD explained

It also sets out that sustainability should be further embedded into the corporate governance framework.

The Corporate Sustainability Due Diligence Directive (CSDDD) is a key component of this strategy, along with the Corporate Sustainability Reporting Directive (CSRD).

CSRD is an “obligation to publish”, while CSDDD is an “obligation to act”. As such, they are complementary. Companies complying with CSRD will not need to report separately on due diligence, nor on its transition plan for climate change mitigation.

CSDDD in-scope companies, in short

• EU companies with more than 1000 employees (calculated on a full-time equivalent basis) and a net worldwide turnover of more than 450 M€ in the last financial year
• EU companies under franchising or licensing agreements in the EU, with royalties of more than EUR 22,5 million, provided that the ultimate parent company had a worldwide net turnover of at least 80 M€ in the last financial year
• Non-EU companies, including ultimate parent company of a group that on a consolidated basis generated a net turnover of more than 450 M€ in the EU in the last financial year
• Ultimate parent companies are jointly liable with their subsidiary for a failure of the latter to comply with its CSDDD obligations

Entry into force

• 2027: > 5 000 employees and > 1 500 M€ net worldwide turnover
• 2028: > 3 000 employees and > 900 M€ net worldwide turnover
• 2029: > 1 000 employees and > 450 M€ net worldwide turnover

Due diligence obligations

Companies shall conduct risk-based human rights and environmental due diligence by carrying out the following actions – coherent with the six steps defined by the OECD Due Diligence Guidance for Responsible Business Conduct:

• Integrate due diligence into their policies and risk management systems in accordance with Article 5.
• Identify and assess actual or potential adverse impacts in accordance with Article 6 and, where necessary, prioritise potential and actual adverse impacts in accordance with Article 6a.
• Prevent and mitigate potential adverse impacts, and bring actual adverse impacts to an end and minimize their extent in accordance with Articles 7 and 8.
• Provide remediation to actual adverse impacts in accordance with Article 8c.
• Carry out meaningful engagement with stakeholders in accordance with Article 8d, in particular to gather the necessary information on actual or potential adverse impacts.
• Establish and maintain a notification mechanism and complaints procedure in accordance with Article 9.
• Monitor the effectiveness of their due diligence policy and measures in accordance with Article 10.

And:

• Publicly report on due diligence in accordance with Article 11, by publishing on the website an annual statement, or by complying to sustainability reporting requirements under CSRD. From 2029, companies need to make the reporting digitally accessible on the European Single Access Point (ESAP)
• Retain documentation regarding the actions adopted to fulfill their due diligence obligations for the purpose of demonstrating compliance, including supporting evidence, for at least 5 years or as long as there is an ongoing judicial or administrative proceeding under the CSDDD.

The company shall

• Take appropriate measures to identify and assess actual and potential adverse impacts arising from their own operations or those of their subsidiaries and, where related to their chains of activities, those of their business partners.
• Map their own operations, those of their subsidiaries and, where related to their chains of activities, those of their business partners, in order to identify general areas where adverse impacts are most likely to occur and to be most severe.
• Based on the results of that mapping, carry out an in-depth assessment of the own operations, those of their subsidiaries and, where related to their chains of activities, those of their business partners, in the areas where adverse impacts were identified to be most likely to occur and most severe.
• Prioritise requesting such information, where reasonable, directly from business partners where the adverse impacts are most likely to occur.

As a last resort, company shall be required to refrain from entering into new or extending existing relations with a business partner in connection with or in the chain of activities of which potential adverse impacts has arisen that could not be prevented or adequately mitigated.

Scope of responsibility, in short

The CSDDD contains a risk-based approach: an in-scope company has the obligation to take measures if it is directly responsible for the CSDDD-risks and actual impacts.

Otherwise, the responsibility extends to a general duty of care of the in-scope company.

The CSRD applies to a company’s value chain whereas the CSDDD applies to a company’s ‘chain of activities’ meaning:

• activities of a company’s upstream business partners related to the production of goods or the provision of services by the company,
• including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of the products and development of the product or the service, and
• activities of a company’s downstream business partners related to the distribution, transport and storage of the product, where the business partners carry out those activities for the company or on behalf of the company.

The CSDDD does not cover the disposal of the product, nor the activities of a company’s downstream business partners related to the services of the company.

Combating climate change (article 15)

Companies shall adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, that the business model and strategy of the company are compatible with the:

• transition to a sustainable economy
• limiting of global warming to 1.5 °C in line with the Paris Agreement
• objective of achieving 2050 climate neutrality targets.

The transition plan shall be updated every 12 months and include a description of the progress the company has made towards achieving the targets.

Companies that report a transition plan for climate change mitigation in accordance the sustainability reporting requirements under CSRD shall be deemed to have complied with the adoption obligation.

The design of the transition plan referred to in the first subparagraph shall contain:

• time-bound targets related to climate change for 2030 and in five-year steps up to 2050 based on conclusive scientific evidence and including, where appropriate, absolute emission reduction targets for greenhouse gas for scope 1, scope 2 and scope 3 greenhouse gas emissions for each significant category;
• a description of decarbonisation levers identified and key actions planned to reach targets referred to under point (a), including where appropriate changes in the undertaking’s product and service portfolio and the adoption of new technologies;
• an explanation and quantification of the investments and funding supporting the implementation of the transition plan;
• a description of the role of the administrative, management and supervisory bodies with regard to the plan.

System of control, penalties and liability

• An administrative supervision and sanctions, including “naming and shaming” and maximum penalties of not less than 5% of the net worldwide turnover of the company in the financial year preceding the fining decision (article 20).
• Strong possibilities for civil enforcement, as in-scope companies will be liable for damages caused by a breach of their obligations under the CSDDD (article 22).

An in-scope company can be held liable for damages caused to a natural or legal person, provided that the in-scope company intentionally or negligently failed to comply with the obligations under the CSDDD, and as a result of such failure to comply, damages to the natural or legal person’s legal interest protected under national law was caused.

An in-scope company cannot be held liable if the damage was caused only by its business partners in its chain of activities.

You are welcome to contact us if you need to put a policies and risk management system in place to comply with – and report on – CSDDD and CSRD.

Source: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CONSIL:ST_6145_2024_INIT

#getCSRDready, #CSRD, #ESRS, #CSDDD, #ESG, #Strategy, #Governance, #SustainabilityReporting, #Digitalisation, #Cleerit