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What is the Corporate Sustainability Due Diligence Directive (CSDDD)?
The Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) is a new European directive, enacted in 2024, which imposes obligations on companies to due diligence in the field of sustainability. Its objective is to ensure that companies identify, prevent, mitigate and minimize negative impacts on human rights and the environment, not only in their activities, but long the entire value chain.
With this legislation, the European Union aims to combat harmful practices such as labor exploitation, child labor, loss of biodiversity, pollution and destruction of ecosystems. Companies will therefore be called upon to integrate sustainability into their decision-making processes and relationships with suppliers and partners, taking concrete measures for a more responsible future.
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CSDDD and CSRD: how are the two European Directives on sustainability related?
CSDDD directive completes the European regulatory framework on sustainability, operating in close connection with Corporate Sustainability Reporting Directive (CSRD).
While the CSRD focuses on expanding thereporting obligation, requiring companies to publish a sustainability report detailed, the CSDDD introduces the concept of due diligence, or 'due diligence', focusing on the entire supply chain of companies.
In practice, with the CS3D companies will no longer have to limit themselves to reporting their impact, but will be obliged to take concrete measures to prevent, mitigate and reduce the negative effects of their operations, both within the EU and in non-European countries, where these impacts derive from their value chain.
But then, how are the CSRD and the CSDDD related to each other?
As mentioned, the CSRD is focused on transparency And on sustainability reporting corporate. Companies must clearly state their environmental and social impacts, including those related to supply chain, but its primary focus remains on transparency and reporting, rather than the active implementation of concrete actions.
This is where CSDDD comes into play, requiring companies to identify, map and mitigate environmental and social impacts along the entire supply chain. In summary, while the CSRD focuses on information disclosure, the CS3D establishes stricter and more operational obligations, requiring concrete actions for the management of sustainability in the value chain.
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The 7 steps of the due diligence process
The process of due diligence analysis of companies takes place through a process that can be summarized in 7 phases. Let's see what they are.
- Integration of due diligence
Companies must incorporate due diligence into their risk management policies and systems, adopting a code of conduct, company policies and measures to verify compliance. - Identifying and evaluating negative impacts
Real and potential negative impacts on human rights and the environment must be identified and evaluated, with particular attention to issues such as child labor, labor exploitation, pollution, deforestation and damage to ecosystems. Companies must carry out an in-depth mapping and analysis to identify the areas most at risk. - Reporting tools and complaint channels
Companies must set up accessible, fair and transparent mechanisms to allow individuals or organizations to report negative impacts, ensuring protection from possible retaliation against complainants. - Stakeholder engagement
It is mandatory to consult effectively and transparently with employees, unions, consumers, local communities, human rights and environmental institutions, and other civil society organizations that may be impacted by business activities. - Preventing, stopping or minimizing negative impacts
Companies must take appropriate measures, including:
- request from business partners contractual guarantees of compliance with the code of conduct;
- develop and implement action plans with indicators to measure improvements;
- make financial and non-financial investments for operational and infrastructure adjustments;
- modify business strategies, purchasing, design, and distribution practices to reduce negative impacts.
- Monitoring and evaluation of the effectiveness of the measures
Companies must carry out periodic due diligence assessments in their operations and in the value chain, based on qualitative and quantitative indicators and feedback from interested parties. - Reporting of due diligence policies and measures
Companies must document and report their due diligence actions in accordance with the CSRD Directive.
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Which companies are subject to CSDDD and since when?
The CSDDD directive came into force on July 25, 2024 and EU member states will have until July 26, 2026 to receive it within their respective national laws.
As is already happening for the CSRD, the CSDDD will also apply to companies following a Progressive logic depending on the size of the company itself.
Let's see what the deadlines set by the directive are.
Dal July 26, 2027:
- European companies with more than 5,000 employees and a global turnover of at least 1.5 billion euros;
- non-EU companies with a turnover of 1.5 billion euros generated in the European Union.
Dal July 26, 2028:
- European companies with more than 3,000 employees and a global turnover of at least 900 million euros;
- non-EU companies with a turnover of 900 million euros generated in the EU.
Dal July 26, 2029:
- European companies with more than 1,000 employees and a global turnover of at least 450 million euros;
- non-EU companies with a turnover of 450 million euros generated in the EU;
- companies that, although having no more than 1,000 employees Or a turnover greater than 450 million euros, are the parent companies of a group that exceeded these limits in the last financial year;
- companies that manage a franchise or licensing system in the EU, with standardized agreements and license fees exceeding 22.5 million euros. In addition, the group's global revenue must exceed 80 million euros.
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How is the check carried out and what are the penalties provided for?
The CSDDD directive requires each EU country to establish asupervisory authority responsible for verifying that companies comply with their obligations. These authorities will have to carry out inspections and, in the event of non-compliance, they may Impose sanctions that can go up to 5% of global net sales of the company.
The national authorities will then be coordinated at Community level by a European Network of Supervisory Authorities, to ensure a uniform application of the directive.
Also individual citizens, unions or civil society organizations affected by a violation of human rights or environmental standards may bring legal action against a company, within a maximum period of 5 years.
In addition to economic sanctions, businesses could suffer a serious Damage to the image: being sanctioned for violations of the CSDDD could compromise their reputation, with potentially more significant economic consequences than the sanction itself.
