Critics have complained that the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) has been excessively watered down to win approval from EU member states, reducing by nearly two-thirds the number of companies that must address environmental damage and human rights violations in their supply chain. But IMS Luxembourg’s Laetitia Georgel and Charlotte Michon Avocat’s Lily Coisman argue that the legislation still represents an important step in the right direction for corporate responsibility, one that may inspire legislators in other countries.
The answers to the questions in this Q&A reflect the insights from both Laetitia and Lily.
Do you believe that the approval of the Corporate Sustainability Due Diligence Directive by EU member states is a welcome step, even though its provisions have been diluted in order to secure agreement?
First proposed in February 2022, the Corporate Sustainability Due Diligence Directive has been subject to scrutiny and debate for the nearly two years it took to reach a provisional agreement at the end of 2023. However, since the agreement was not fully supported by all European Union member states, the final version was modified in order to receive approval from the European Parliament and the EU Council, which led to its formal adoption earlier this year.
The text has been watered down mainly in terms of thresholds for the directive’s application, which have been raised and thus apply to far fewer companies than originally intended:
- European companies with more than 1,000 employees (up from 500) and turnover of €450 million (up from €150 million)
- Non-EU companies that meet the €450 million threshold for activities within the EU
In addition, the directive’s application at lower thresholds for companies in so-called ‘high-risk’ sectors (agriculture, mining, textiles and construction) has also been withdrawn. It should also be noted that the obligation of vigilance imposed by the legislation will be phased in gradually, with thresholds to begin decreasing from 2027.
Many of the directive’s detractors, such as NGOs, human rights defenders and even many businesses, are highly critical of the last-minute changes, which they say undermine the impact of the agreement and detract from the general concept that companies must improve their commitment to sustainability. Though there is truth to this argument – and it is a shame some original elements of the directive have had to be ‘diluted’ – many believe it is still an important step in the right direction.
As with so many sustainability-related arguments, advocates of the directive argue that ‘something is better than nothing’ – a weakened directive is better than nothing at all. It is crucial to remember that progress in sustainable development is not linear and must start from somewhere, even if that starting point is not ideal. They also point out that the directive’s passage sends a signal that regulation on this issue is evolving, which raises the bar for sustainability standards.
How significantly will the directive’s impact be limited by raising the employee and revenue thresholds for companies in scope?
The updated version reduces the number of companies subject to the directive by more than 60%, from around 15,000 to 5,500, so the legislation will impact fewer organisations than originally intended.
However, even if SMEs have unfortunately been excluded from its scope, the directive will still impact smaller businesses that are part of the value chains of larger companies, so they will indirectly fall under the CSDDD’s scope to some extent.
In addition, as part of the directive’s aim to prevent and eliminate negative impact on human rights and the environment, the directive envisages targeted and proportionate support for business partners that are small and medium-sized businesses, such as providing or facilitating access to capacity building, training or upgrading of management systems, and including financial support where the due diligence expected of the SME would compromise its viability. So, although SMEs are not subject to the directive as such, some will be impacted by it indirectly.
Is it reasonable to argue, as some member states including Luxembourg have done, that bringing financial institutions and in particular investment management firms under the directive would place an excessive administrative burden compared with that on non-financial companies?
The argument made by these countries is in fact somewhat different. It is important to distinguish between the excessive administrative burden, which was the argument put forward by some governments and business representatives, and the exclusion of asset management and investment activities on the grounds that this would involve downstream activities, and therefore not part of the supply chain on which the obligation to exercise due diligence should focus.
It’s true that the regulations imposed under the European Green Deal place an administrative burden on organisations, and the same goes for the Corporate Sustainability Reporting Directive. However, these pieces of legislation must be regarded as much more than simple compliance exercises. They deal with the way organisations do business, and some of the areas they cover, such as transparency and reporting, tend to scare companies for good reasons and bad.
Ultimately, while heightened transparency can at first represent an uncomfortable transition for an organisation, it should be viewed as an opportunity to lead the market and become a frontrunner rather than a follower.
Organisations are facing an adaptation challenge that will oblige them to upskill their staff and develop sustainability talent if they don’t want to become laggards. Market leaders will treat sustainability as a fully integrated part of their business, enabling them to maintain a competitive edge in their particular sector.
While financial businesses are included in the directive’s scope, it is only to a limited extent. The financial sector will only have to apply the CSDDD in their own operations and upstream supply chains, meaning that investment and lending activities are excluded — at least for now, although it cannot be ruled out that this decision will be reconsidered at a later stage.
The United Nations Working Group on Business and Human Rights says this aspect of the directive is a disappointment. It argues that the financial sector has “a particularly important role in respecting human rights … and an unparalleled ability to influence companies and scale up the implementation of the [UN’s] Guiding Principles on Business and Human Rights”.
This is why the exclusion of the financial sector from the CSDDD is seen by many as a missed opportunity to send a clear message. There is an urgent need for the sector to rise to the challenge and obtain a better understanding of the impact of its downstream activities.
Finally, it should be remembered that the UN Guiding Principles do not differentiate the obligation to ‘respect’ human rights according to the sector in which the company is active, but whether the company, in its commercial relations, causes, contributes to or is directly linked to a negative impact on human rights.
Guidelines and interpretation from the United Nations, the OECD and sector initiatives such as the Thun Group of Banks have been documenting how these principles apply to the financial sector and financing activities for a long time.
How meaningful will the directive’s effect be in the absence of wider global agreement on reporting by businesses on environmental impact and human rights? Are there signs that other countries outside the EU might enact comparable legislation?
In fact, several references and frameworks already exist, notably the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct. Though these do not impose legal obligations on businesses, they have inspired the CSDDD.
At European level, several countries have already adopted similar legislation. France was a forerunner with its 2017 law on duty of vigilance, but more recently Germany, Norway, the Netherlands and Switzerland have adopted regulations on child labour and supply chains linked to minerals from conflict zones. The existence of the EU’s large single market means that the CSDDD can raise the bar on corporate responsibility outside Europe.
Admittedly, the CSDDD likely will not be the catalyst that inspires change on a global scale to reporting by businesses on environmental impact and human rights. However, its entry into force strengthens a trend in the right direction.
A shift from soft law to hard law is also taking place outside Europe, with countries including Canada, the United States and Australia adopting transparency legislation. The US is also adopting detailed regulation to prohibit the circulation within its economic market of products derived from forced labour by Uyghurs in China.
Looking more closely at parallels between national laws, requirements that call for companies to demonstrate that certain products have not been the cause of human rights violations or damage to the environment are similar to the approach taken in the recent EU legislation on zero deforestation, batteries, minerals from conflict zones and forced labour.
What will companies that are in scope of the CSDDD need to do to prepare to meet their obligations under the directive? To what extent will these requirements differ from or complement those arising under the Corporate Sustainability Reporting Directive?
The major difference between the CSDDD and the CSRD is that the former is about an obligation to act, while the latter is an obligation to report.
In other words, the aim of the CSDDD is to reinforce due diligence requirements for companies in their value chains. The CSRD addresses reporting and transparency – it is based on the principle of double materiality, that is, both how companies impact environmental and social issues, and how environmental and social factors can affect those companies.
In practice, this has very important implications, since under the CSDDD companies will have to demonstrate an effective due diligence process, whereas under the CSRD it will entail being transparent about what is done or not done. Together these directives are intended to ensure that companies are responsible and embrace transparency.
The CSDDD’s obligations involve defining an overall vigilance policy, identifying and assessing actual or potential negative impacts, defining measures to manage and mitigate these impacts, or remedy the impact where necessary, setting up alert and notification mechanisms, and establishing monitoring systems and indicators.
Although the directive does not cover climate change explicitly, it requires companies to adopt and put into effect a climate transition plan requiring best efforts to ensure that their business model and strategy is compatible with the Paris Agreement goal of keeping global warming below 1.5 degrees.
What prospects do you see for extending the scope of the legislation in future to expand its scope to smaller companies and financial businesses?
Although a five-year review clause introducing the possibility of the financial sector being included within the scope of the directive was part of the EU’s trilogue agreement in December 2023, it was dropped during the negotiations that preceded the adoption of the final version. As a result, there is no certainty that smaller companies will be included in the future.
Following the directive’s publication in the Official Journal of the EU on July 5, 2024, member states now have two years to transpose it into national law. This may seem a long way off, but it is in companies’ best interest to start implementing a vigilance procedure, since the planned national monitoring authority will be able to investigate, monitor and order measures and sanctions on the basis of what already exists.
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Laetitia Georgel joined IMS in 2021 after having evolved professionally in large international groups, particularly in the agri-food sector. A graduate of IPAG and the University of Paris Panthéon – La Sorbonne, she has completed various training programmes in sustainable development, has earned the qualification to run the Climate Collage, and obtained the Responsible Digital Knowledge certificate from the INR. At IMS, Laetitia is in charge of the coordination of transversal projects on the Prosperity pillar, the Clubs and the relationship with the international partners for which IMS is the National Contact Point (WBCSD, Capitals Coalition).
Lily Coisman is a lawyer at the Paris bar and associate at the firm Charlotte Michon Avocat, whose team supports French companies in formalising their human rights procedures and compliance with their due diligence. Her experiences in companies, national and international jurisdictions, ministries, law firms and associations, allow her to understand the challenges of the due diligence from different legal prisms and to offer adapted and operational support in human rights, protection of environment and criminal law.
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