What does that mean?
The EU has once again postponed voting on the Corporate Sustainability Due Diligence Directive (CSDDD). They were first supposed to vote on the legislation last Friday, it was postponed until Wednesday of this week and now it's been postponed again.
The CSDDD was introduced by the European Commission in February of 2022. The European Council and European Parliament put forth their own CSDDD proposals and the differences were negotiated to get to the proposal that is now before a vote.
The CSDDD aims to establish a framework of corporate due diligence for companies to assess human rights and environmental risks and to establish processes to mitigate these risks. While the Corporate Sustainability Reporting Directive (CSRD) is about corporate disclosure requirements, the CSDDD is focused on actual corporate actions.
Under the CSDDD, companies are required to:
Integrate due diligence into their policies
Carry out risk analyses
Prevent and mitigate potential adverse impacts
Establish a complaints procedure
Monitor the effectiveness of their due diligence policy and measures
Communicate publicly about the due diligence undertaken
Create climate transition plans in line with the Paris Agreement
The CSDDD applies to:
EU companies with more than 500 employees and more than EUR 150 million global turnover, and
Companies outside the EU with more than EUR 150 million of turnover in the EU
THE EU expects the law to impact about 13,000 countries within the EU and around 4,000 non-EU companies.
Importantly, companies will need to impose CSDDD obligations up and down their supply chains. This includes third parties involved in the production of goods and services provided by the company. For financial institutions, this also includes clients receiving loans or other financial services. This provision for banks aims to address financing for fossil fuel companies for example.
The CSDDD includes two enforcement mechanisms:
Administrative supervision and sanctions, including naming and shaming and heavy fines (maximum penalty is at least 5% of net turnover).
Civil enforcement: In-scope companies are liable for damages resulting from breaches of CSDDD obligations
Political Developments
Germany has been actively involved in the negotiations around the CSDDD. Recently, however, Germany announced its abstention on the proposed CSDDD vote. Finland, Sweden, and Italy have also shown signs of abstaining. The Free Democratic Party (FDP), a minority party in the German governing coalition, is behind this move in Germany. The FDP and those that oppose the law, feel that the CSDDD will harm Germany’s competitiveness in global markets.
To pass, the CSDDD must obtain a "qualified majority" of the votes. This requires 15 countries representing at least 65 percent of the European Union's population to support the CSDDD. An abstention under qualified majority voting counts as a "no" vote.
If passed, how will CSDDD impact businesses outside the EU?
Supply chains are global, so even if a company outside the EU is not directly impacted by the CSDDD, it will almost certainly be indirectly impacted. It is therefore prudent for non-European companies to understand the regulation and plan accordingly. Companies outside the EU should perform a gap analysis to see if their current practices and policies leave them at risk of falling afoul of the CSDDD.
Companies both inside and outside the EU will need to revisit their due diligence policies, to ensure that they are in line with the CSDDD, or whatever replaces it. Concerns over human rights and environmental issues are not going away. Companies that manage these risks best will likely be favored by consumers and investors over the long term.
A delay in the adoption of the CSDDD is just that, a delay. Legislation in Europe and around the world is likely to continue the march forward to address human rights and environmental issues. The current drama surrounding the CSDDD does not mean the policy around these issues is dead, merely delayed.
Companies and investors should plan accordingly.