Introduction to EU Corporate Sustainability Due Diligence (CSDDD)

In the last possible minute to deliver new legislation before the coming EU-elections in June, the EU member states managed to agree on the CSDDD directive. Large businesses are now obliged to carry out environmental and human rights assessments in their own operations and in their value chains.

CSDDD stands for Corporate Sustainability Due Diligence Directive.

Due diligence here means due diligence assessments of the same type that we have become familiar with through the Norwegian Transparency Act. It implies that the UN's guiding principles for business and human rights are codified in EU legislation for the first time. The directive's purpose is to change businesses' behavior by requiring transparency. It is fantastic!

In Norway we have the Openness Act, or ***Act on Business Transparency and Work with Basic Human Rights and Decent Working Conditions.*** Several EU member states already have similar legislation, but most have lacked sufficient legislative coverage to be able to enforce compliance. A harmonised legal framework is now being established in the EU based on the CSDDD directive, which ensures equal conditions of competition while increasing transparency and accountability by incorporating human rights and environmental considerations into corporate governance, both in and outside Europe.

The requirements for activity that the directive places on businesses are primarily similar to the process requirements in the Norwegian Transparency Act, which are to identify, prevent, reduce, and stop potential and actual negative impacts.

Here, it applies not only to human rights, such as child labour and labour exploitation, but also to the environment, including issues such as pollution and deforestation. In addition, the CSDDD directive requires businesses that are not already required to adopt and implement transition plans to reduce their climate impact and adapt their business model and strategy to sustainability and climate goals to do so.

What are the requirements according to CSDDD?

Companies with turnover over €450 million and more than 1,000 employees must:

1. Incorporate due diligence assessments into their internal guidelines.
2. Identify actual or potential negative impacts on human rights and the environment.
3. Prevent and reduce potential negative consequences for human rights and the environment.
4. End actual adverse impacts and minimise their extent.
5. Establish and maintain an internal complaints procedure.
6. Monitor the effectiveness of their due diligence work.
7. Publicly communicate the measures taken to close non-conformities (obligation to report).
8. Adopt a plan to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with limiting global warming to 1.5 °C in line with the Paris Agreement (which they can calculate with the EU taxonomy)
9. Engage in dialogue and activate trading partners upstream and downstream in the value chain.

What happens if a business does not follow the directive?

The Member States must determine the penalties for violations of national laws that comply with the directive's provisions. According to the CSDDD text, the punishment must be effective, proportionate, and dissuasive and include both financial sanctions and "name and shame" measures.

Monetary charges are determined based on the company's global net turnover, with a maximum penalty limit set at a minimum of 5% of the company's global net turnover from the previous financial year. Member States can also adopt stricter national measures.

Are these demands reasonable?

Millions of people will benefit from the enforcement of human rights — especially those who are victims of modern slavery and other victims of corporate negligence and abuse. Responsible companies will also benefit from a level playing field, and companies will finally become more involved in the fight against climate change.

In Norway, we have the Transparency Act, which by law requires companies to contribute to promoting respect for basic human rights and decent working conditions. It's important to note that things don't have to be perfect. It is a requirement that you uncover risks and that your business must have a process for improvement. Companies must verify their suppliers to ensure compliance with ethical legislation, such as prohibiting the use of forced or child labor in production processes.

At Factlines, we have worked on creating software for sustainability work in supply chains for over 10 years, and we have in-house expertise in the field. Our solutions are designed specifically to identify and follow up on the supply chain and make calculations for the EU's taxonomy.

April 2024