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Overcoming Obstacles: The Journey to Approval of the CSDDD
After weeks of negotiations, delays, and political manoeuvring, the European Commission has finally approved the Corporate Sustainability Due Diligence Directive (CSDDD). This directive, designed to hold companies accountable for environmental and human rights violations within their supply chains, has undergone significant changes to secure approval. However, the question remains: Can the CSDDD still fulfil its intended purpose?
The CSDDD sets a standard for corporate due diligence on sustainability issues, focusing on environmental concerns, climate change, and human rights. The directive applies not only to the actions of the company itself but also to its subsidiaries and supply chain, potentially holding EU-based companies and international businesses operating within the EU liable for the actions of their suppliers.
The journey towards approval has been tumultuous. The final draft of the CSDDD, released on January 30, faced unexpected opposition, particularly from countries like Germany, Austria, and Italy, citing concerns about overburdening companies with reporting requirements and discouraging investment in EU markets.
Despite initial support for the directive, the European Council faced challenges in gaining a majority vote. Closed-door negotiations and leaked deals characterized the process, with each iteration of the directive reducing its scope and provisions. The final deal, approved on March 15, represents a significant departure from the original proposal.
Perspectives on Changes in the Approved CSDDD
The CSDDD has undergone significant revisions, including a narrowed scope with specific thresholds for company size and turnover, a removal of risk sectors with added flexibility for future adjustments, and a phased implementation starting with larger companies.
Key changes in the approved CSDDD include thresholds to be set at 1,000 employees and €450 million in turnover, compared to the initial thresholds of 500 employees and €150 million in turnover. Additionally, the directive will be phased in gradually, with larger companies impacted first, followed by smaller ones over several years.
While some view the approval of the watered-down directive as progress, others express disappointment. Natalie Stafford 1, head of ESG at risk management firm S-RM, sees it as a significant step forward that can be built upon in the future. However, Isabella Ritter from ShareAction criticizes policymakers for prioritizing political gamesmanship over the interests of stakeholders, warning that the diluted measures may not yield tangible results for years to come.
The removal of provisions such as the CSDDD mechanism for trade unions to sue non-compliant firms and the narrowing of responsibilities regarding waste management further diminish the directive’s impact. Concerns also arise regarding loopholes that absolve companies of responsibility for the actions of organizations they work with indirectly.
The directive also sets out simplifications in accountability measures by eliminating references to director remuneration and amendments to access to justice provisions emphasize victim authorization and prevent opt-out lawsuits. Additional refinements include clarified definitions of downstream activities and the removal of a joint statement on the financial sector. These changes, though subject to debate, aim to fortify the CSDDD, with close scrutiny expected as it progresses to assess its impact on corporate accountability and sustainability practices.
The Road Ahead: Implementation of the CSDDD
The true potential of the CSDDD lies in its implementation and enforcement. While the directive has ambitious goals and requirements, its effectiveness ultimately depends on how rigorously it is enforced and how diligently companies comply with its provisions. To fully realize the benefits of the CSDDD, it is essential for governments to allocate resources for monitoring and enforcement mechanisms, as well as for providing support and guidance to businesses in their compliance efforts.
CSDDD has the power to foster collaboration and partnership between businesses, governments, and civil society organizations. By requiring companies to engage with stakeholders and address their concerns, the directive promotes dialogue and cooperation towards common sustainability goals. This multi-stakeholder approach can lead to the creation of shared value and the development of holistic solutions to complex sustainability challenges.
Key Considerations for Companies Under the CSDDD:
Company scope reduced to 1,000 employees and €450 million turnover, a 70% cut from original parameters
- Deletion of risk sectors, accompanied by a revision clause for adaptability
- Progressive application of the directive: companies with 5,000 employees and €1.5 billion turnover impacted first, within 3 years
- Removal of reference to director remuneration (Article 15(3))
- Changes to access to justice provisions in Article 22:
- Clarification that authorization from victims is key for legal standing, preventing opt-out lawsuits
- Refinement of downstream activities definition:
- Limits references to product disposal
- Restricts to business partners directly engaged in company activities, deleting ‘indirect’ relationships
- Deletion of the joint statement on the financial sector
Moving Forward: The Potential of the CSDDD in Driving Corporate Sustainability
The CSDDD represents significant progress in corporate sustainability. The directive will now proceed to the European Parliament for approval, with expectations that it will pass through the legal affairs committee.
Peter Sweetbaum, Ethixbase360 Chief Executive Officer, says: “Reflecting on the forthcoming implementation of the CSDDD, it’s a watershed moment for environmental and social governance in the corporate world within the EU. Supplementing regulations such as CSRD, this directive challenges us to integrate sustainability not as an afterthought, but as a cornerstone of corporate culture and responsibility, and operationally with clear accountability and responsibility throughout the organization. “ESG” is no longer the preserve of compliance, legal and procurement teams – the expectations and intent behind CSDDD are far more pervasive. Organizations need to now take tangible steps towards a future where environmental and social governance is stitched into the “run” side of the business, and not just corporate policy. The key for CSDDD lies within governments to be ready, willing and able to enforce applicable legislation. Countries like the UK have been slow in areas, including Modern Slavery and Human Rights, where the relevant Act has “limited teeth” without enforcement. The road ahead is undoubtedly complex, but it’s a journey worth embarking on for the promise it holds in transforming our business practices for the betterment of our society and the planet.”
The CSDDD holds huge potential in driving corporate sustainability by promoting accountability, fostering innovation, and facilitating collaboration. By encouraging companies to prioritize environmental and social considerations in their business operations, the directive can contribute to a more sustainable and equitable future for both businesses and society. However, realizing this potential requires concerted efforts from all stakeholders to ensure effective implementation and enforcement of the directive.
In conclusion, while the CSDDD has undergone significant changes and compromises, its approval signifies a crucial step towards holding corporations accountable for their social and environmental impacts. However, the true test lies in its implementation and effectiveness in driving meaningful change in business practices. Only time will tell if the salvaged deal can deliver on its promise of corporate sustainability.
