CSDDD – A Deep Dive into the Corporate Sustainability Due Diligence

The Corporate Sustainability Due Diligence Directive (CSDDD or CS3D), issued in March 2024, mandates large EU companies to identify, reduce, and mitigate adverse human rights and environmental impacts. It is part of the European Green Deal, which aims to achieve carbon neutrality and a circular economy by increasing data granularity, enhancing transparency, and aligning corporate climate transition plans through the following actions:

1. Redirecting capital flows toward sustainable investment by defining green economic activities according to the EU Taxonomy.
2. Promoting transparency and a long-term sustainable development perspective through CSRD’s disclosure requirements in terms of environmental, social, and governance data, ensuring that companies provide reliable and comparable information needed by investors and other stakeholders.
3. Integrating sustainability risk management by acting on the CSDDD’s obligations to define and implement due diligence process to identify avoid and mitigate adverse human rights and environmental impacts across a company’s chains of activities.

The CSDDD draws from the UN Guiding Principles on Business and Human Rights (UNGP) and the OECD Guidelines for Multinational Enterprises. These frameworks guide companies to conduct human rights due diligence, addressing adverse impacts linked to their operations, and adapting to changes over time.

The OECD Guidelines cover topics like disclosure and human rights, urging businesses to avoid adverse impacts and disclose due diligence processes. The EU has introduced directives based on these frameworks, pushing member states to update national regulations, leading to more stringent disclosure and human rights due diligence laws since the European NFRD in 2014.

For companies, these regulations require the implementation of human rights policies and due diligence processes, with risks of reputational and legal consequences for non-compliance. Some companies have proactively developed codes of ethics and ESG charters, and sectoral initiatives like the CAC 40 ESG Index highlight ethical behavior.

The French Pact Law exemplifies a hybrid approach between soft and hard law, allowing companies to include a “raison d’être” in their bylaws and transform into mission-driven entities. This law bridges soft and hard law, promoting transparency, disclosure, and accountability in business decisions, making the CSDDD crucial for managing human rights and environmental impacts.

The CSDDD applies to different clusters of companies :

• EU companies with 1,000 employees and over EUR 450m in worldwide turnover
• Non-EU companies, parent companies and foreign franchises with over EUR 450m net turnover in the EU
• Companies having franchise or licensing agreements in the EU with over EUR 80m in global turnover and at least EUR 22,5m generated by royalties

And will apply according to the following phased out timeline:

• 2024-2026: EU member states expected to transpose the CSDDD into national law
• 2026-2027: CSDDD will be effective at the national level.
• 2027: Compliance required of companies with more than 5,000 employees and net turnover of EUR 1,500m
• 2028: Compliance required of companies with more than 3,000 employees and net turnover of EUR 900m
• 2029: Compliance required of companies with more than 1,000 employees and net turnover of EUR 450m

The French due diligence law, “Droit du Devoir de Vigilance,” was enacted in 2017, making France a leader in regulating due diligence through national law. It applies to French companies with over 5,000 employees and foreign companies with subsidiaries of over 10,000 employees in France. The law requires companies to create a due diligence plan to identify and prevent risks to human rights, freedoms, health, safety, and the environment.

In comparison, the CSDDD also focuses on due diligence but has a broader scope, covering smaller companies and including global turnover as a criterion. The CSDDD aims to streamline processes to identify, avoid, and mitigate human rights and environmental impacts, aligning due diligence plans with EU obligations and climate transition goals. Some key distinctions between the two regulations are:

Sure, here is the paragraph rewritten using bullet points:

1. A climate change transition plan is required under CSDDD but not in French law.
2. Companies must integrate the principles of vigilance into their internal policies and take more proactive and preventive measures.
3. There is an obligation of means, meaning companies may need to prove all actions taken to achieve their objectives in case of alleged breaches. This is not present in French legislation.
4. A supervisory authority was created under CSDDD, which includes a civil liability penalty system.
5. The CSDDD also provides for financial penalties, unlike the French duty of vigilance law.

The CSDDD has a broader scope of application regarding its concepts than the French Devoir de Vigilance. While this has been somewhat challenging for French companies subject to the duty of vigilance law to understand, the extent of the CSDDD text allows for clearer wording, more specific providing more specific definitions of key concepts. The European Commission is required to adopt guidelines by July 2027, which should assist companies in implementing these obligations.

The Corporate Sustainability Reporting Directive (CSRD), on the other hand, primarily focuses on reporting and applies to a wider range of companies, including EU-listed companies, large unlisted companies with over 250 employees and €50 million in annual turnover, and some non-EU companies with an EU presence.

The CSDDD indicates the measures, procedures and monitoring mechanisms that can be embedded in a company’s management systems

1. Enhancing the existing policies and risk management mechanisms (reported through CSRD) with company-wide, harmonized due diligence procedures based on a corporate code of conduct with application to all stakeholders in the value chain.
2. Use the integrated due diligence procedures to identify actual adverse impacts (those caused by own or business partners’ operations) but also those that business operations could potentially cause should mitigation not be enacted.
3. Establish appropriate, granular, and transparent measures to prevent, mitigate and bring adverse impacts to an end, included corrective action plans and targeted actions based on company size.
4. Make complaint, claim and notification systems ready and available for all company internal and external stakeholders.
5. Monitoring
6. Communication and transparency
7. Fulfill the transformation by designing and implementing a climate transition plan that can trickle down to all stakeholders and chains of activity related to the company’s operations.

Article 6 of the CSDDD allows parent companies to meet the due diligence obligations of their subsidiaries if they share the necessary information. Subsidiaries must follow the parent company’s adapted policy. This makes reporting easier for parent companies.

EU member states must incorporate the CSDDD into their laws by July 26, 2026. French companies and those in France will need to comply once these laws are in place. Meanwhile, companies should start preparing for these changes.

Companies are providing feedback on their due diligence processes, including how they define and extend commercial relationships beyond tier 1. We want to know what actions they have taken to comply and if these can be used to meet CS3D requirements. Many companies are watching French regulation changes and seeking clarity on rules and the definition of “chains of chain.” Preparing for the French transposition of the CSDDD is recommended to help map risks, set supplier obligations, and define stakeholder duties.

1. Integrate Due Diligence

Establish comprehensive due diligence processes to identify, reduce, and mitigate adverse human rights and environmental impacts across operations and value chains, incorporating vigilance principles into internal policies and taking proactive, preventive measures to comply with CSDDD due diligence obligations.

2. Align with EU Green Deal

Redirect capital towards sustainable investments, promote data granuality and transparency in operations, and integrate sustainability risk management to ensuring reliable and comparable information for stakeholders and align with the EU Green Deal’s objectives.

3. Develop Climate Transition Plans

Create and integrate climate transition plans into business models to support the EU’s goals of carbon neutrality and a circular economy.

4. Anticipate Regulatory Changes

Stay ahead of the impact of regulatory changes by proactively developing codes of ethics, ESG charters, and other sectoral initiatives that highlight ethical behavior. Utilizing hybrid approaches, such as the French Pact Law, cab be a good strategy to incorporate both soft and hard law principles expected to be included in upcoming regulatory obligations.

5. Monitor Potential Differences in the Law

Stay aware of the differences between existing and upcoming law, such as the “Obligation of Means”, asking to prove all actions taken to achieve due diligence objectives or the creation of a supervisory authority with civil liability and financial penalties.

6. Build Strong Stakeholder Engagement Program

To identify, mitigate and avoid risk, and stay aligned with CSDDD compliance, companies should build a strong stakeholders engagement program (including subsidiaries, subcontractors, and suppliers ) with methodology and processes to:

• Define commercial relationships at different supply chain tiers
• Conduct regular stakeholder mapping and assessments to identify where adverse impacts are likely to occur
• Develop an ecosystem of engagement throughout the business cycle to ensure all stakeholders contribute to mitigating adverse impacts
• Set up transparent and reliable communication channels to gather relevant information
• Consult with industry organizations, interest groups, and legal representatives to develop and implement due diligence policies

7. Use Codes of Conduct

Implement codes of conduct that outline due diligence processes and extend their application to all stakeholders in the value chain.

8. Seek Contractual Assurance

Ensure contractual agreements support due diligence efforts and provide capacity building and guidance to business partners.

9. Implement Complaint Mechanisms

Make complaint submission mechanisms available to all stakeholders and ensure periodic monitoring and assessment.

10. Collaborate Across Groups

Take a collaborative approach to streamline due diligence efforts across corporate groups and business partners, maintaining accountability for subsidiaries.

The Corporate Sustainability Due Diligence Directive (CSDDD) marks a significant shift in the European business landscape. While compliance may seem daunting, it presents a valuable opportunity for companies to solidify their commitment to ethical and sustainable practices. By integrating due diligence into core operations, aligning with the EU Green Deal’s goals, and fostering transparency throughout the value chain, companies can not only mitigate risks but also build trust with stakeholders and investors.

The road to CSDDD compliance may be smoother with the right resources and collaborative efforts. Consider joining TOLSON’s SBC (Sustainable Business Community) – a valuable platform for benchmarking progress, sharing best practices, and learning from sustainability leaders. Through their expertise and collaborative approach, SBC can empower your business to navigate the ever-evolving sustainability landscape.

Ready to take the next step? Learn more about SBC’s offerings at https://tolson-consulting.com/sbc-sustainable-business-community/ and reach out to sustainability@tolson-consulting.com to join this vibrant community. Together, we can navigate the path toward a more sustainable future.