The CSDDD applies to large EU companies with a minimum of 1,000 employees and a net turnover exceeding EUR 450 million globally. The legislation also applies to non-EU companies with a substantial presence in the EU, particularly those generating more than EUR 450 mln in revenue from their EU-based operations. While the legislation does not directly apply to SMEs, they may still be affected as part of the supply chains of larger companies.
Though the directive’s application is further down the road, compliance may take several years because of the intricate global value chains of companies. The CSDDD represents a paradigm shift in how businesses operate within the EU, with significant implications for corporate governance, risk management, and stakeholder engagement.
• Increased legal certainty and uniformity: The directive provides a harmonized legal framework across the EU, reducing the fragmentation of national due diligence regulations and creating a level playing field for businesses.
• Enhanced Reputation and Trust: By demonstrating a commitment to human rights and environmental sustainability, companies can foster greater trust with customers, investors, and employees.
• Risk Management and Competitiveness: The implementation of robust, well-established, documented and prepared due diligence processes enables companies to identify and mitigate risks at an early stage, thereby reducing the likelihood of legal disputes and reputational damage.
• Global Influence: The CSDDD establishes a rigorous standard for corporate due diligence that has the potential to shape international norms and practices. As EU companies implement these requirements, their global business partners may also be encouraged or required to adopt similar standards, thus promoting sustainability beyond the EU’s borders.
The correct implementation of CSDDD is a crucial aspect of ensuring compliance, and as such, it places an increased responsibility on a company’s senior management. To integrate sustainability factors into an existing compliance system and ensure the timely commencement of the pre-compliance phase, a dedicated team or a third-party advisory firm with expertise in sustainability, legal and compliance, and industry knowledge may be required.
Once a dedicated team is engaged, the relevant sustainability criteria must be identified first across the company’s entire value chain. This can be achieved by reviewing and assessing internal regulations and partner contracts.
Based on the general compliance project plans, the team may establish a comprehensive due diligence checklist and a thorough risk assessment process. This will involve identifying and prioritizing environmental, social and governance risks based on their potential impact. This will be based on the data collected through stakeholder interviews and an “issue-spotting” review of documents and policies.
Once the critical risk factors have been identified, focused compliance audits will be conducted, with reports summarizing the findings, key risks and recommendations for improvement. This recommendation may form the basis of further action plans, including actionable recommendations, clear sustainability goals, and a practical implementation plan outlining steps, resources, and timelines for the company to comply with CSDDD.
The CSDDD has the potential to establish new global standards for corporate sustainability, influencing practices beyond the EU and contributing to a more sustainable future for all. Businesses, policymakers and civil society must work together to guarantee this pioneering directive’s successful implementation and enforcement, enabling it to fulfill its potential to benefit people and the planet.
This article was first published in the Budapest Business Journal print issue of October 18, 2024.
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