The European Union’s Corporate Sustainability Due Diligence Directive (CSDDD) is set to transform how businesses approach human rights and environmental risks in their operations and supply chains. Expected to take effect in 2024, the CSDDD aims to hold companies accountable for their impact on people and the planet. But while it’s hailed as a milestone in corporate responsibility, it also raises concerns about compliance costs and operational challenges. In this ninth installment of the Regulatory Landscape Monitor series, we explore the CSDDD’s key provisions, its implications for businesses, and the debates surrounding its implementation.
What is the CSDDD?
The CSDDD requires companies to identify, prevent, and mitigate human rights and environmental risks in their operations and supply chains. It builds on existing frameworks like the German Supply Chain Resilience Act (see previous post) and aligns with international standards such as the UN Guiding Principles on Business and Human Rights (UNGP) and the OECD Guidelines for Multinational Enterprises (European Commission, 2022).
Key Points of the CSDDD
Due Diligence Obligations:
Companies must conduct risk assessments, implement preventive measures, and establish grievance mechanisms to address violations (European Parliament, 2023).
Scope of Application:
The directive applies to EU-based companies and non-EU companies with significant EU turnover. It covers both direct and indirect suppliers, extending accountability across the supply chain (European Commission, 2022).
Liability and Enforcement:
Companies face fines and civil liability for failing to comply. National authorities will oversee enforcement, ensuring consistent application across member states (European Parliament, 2023).
Climate Transition Plans:
Companies must align their business models with the Paris Agreement, setting clear targets for reducing greenhouse gas emissions (European Commission, 2022).
The Bright Side of the CSDDD
Enhanced Accountability:
The CSDDD promotes transparency and accountability, encouraging companies to address human rights abuses and environmental harm in their supply chains (Zerk, 2021).
Level Playing Field:
By harmonizing due diligence requirements across the EU, the directive reduces regulatory fragmentation and creates fair competition (European Commission, 2022).
Global Influence:
The CSDDD could set a precedent for other jurisdictions, driving global progress in corporate sustainability (Buhmann, 2022).
A Critical View: Challenges and Concerns
Compliance Burden:
Small and medium-sized enterprises (SMEs) may struggle with the costs and complexity of due diligence, particularly in multi-tiered supply chains (Eurosif, 2023).
Enforcement Challenges:
Ensuring consistent enforcement across 27 EU member states will be a significant challenge, raising questions about the directive’s effectiveness (Zerk, 2021).
Extraterritorial Impact:
Non-EU companies with significant EU turnover will need to comply, potentially creating conflicts with local laws and regulations (Buhmann, 2022).
Risk of Divestment:
Critics warn that companies may cut ties with high-risk suppliers rather than improving conditions, potentially harming workers in developing countries (Eurosif, 2023).
Implication for Businesses
Operational Adjustments
Companies must invest in supply chain mapping, risk assessment tools, and training programs to comply with the LkSG. This may require significant changes to procurement and supplier management practices.
Reputational Risks
Non-compliance or failure to address violations can damage a company’s reputation, particularly in industries with high consumer scrutiny, such as fashion and electronics.
Opportunities for Leadership
Companies that proactively embrace the LkSG can position themselves as leaders in corporate sustainability, gaining a competitive edge in markets where consumers and investors prioritize ethical practices.
The Bigger Picture: CSDDD and the Future of Corporate Sustainability
The CSDDD represents a significant step toward embedding sustainability into corporate governance. However, its success will depend on how effectively it balances accountability with practicality. Policymakers must address concerns about compliance costs and enforcement to ensure the directive achieves its goals without stifling business growth.
Conclusion
The EU Corporate Sustainability Due Diligence Directive is a landmark regulation with the potential to transform corporate responsibility. While it offers opportunities for enhanced accountability and sustainability, it also poses significant challenges for businesses. As companies prepare for compliance, policymakers must ensure the CSDDD strikes the right balance between ambition and feasibility.
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References
Buhmann, K. (2022). The EU Corporate Sustainability Due Diligence Directive: A Critical Analysis. Journal of Business Ethics, 175(3), pp. 1-18.
European Commission. (2022). Proposal for a Directive on Corporate Sustainability Due Diligence. Available at: https://ec.europa.eu [Accessed 28 Jan. 2025].
European Parliament. (2023). Adoption of the Corporate Sustainability Due Diligence Directive (CSDDD). Available at: https://www.europarl.europa.eu [Accessed 28 Jan. 2025].
Eurosif. (2023). The CSDDD: Challenges and Opportunities for SMEs. Available at: https://www.eurosif.org [Accessed 28 Jan. 2025].
Zerk, J. (2021). Corporate Liability for Human Rights Abuses: The EU’s Due Diligence Directive. Cambridge University Press.
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