The EU CSDDD: Gamechanger?

We at Iselin Human Rights are watching many EU proposals that could change business due diligence and supplier chain sustainability. Such proposed pieces of legislation address issues precluding forced labour, climate change, and due diligence for businesses. The EU has started a strategy to achieve a climate-neutral society by 2050, with a focus on sustainability. The Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD) are crucial EU regulations for businesses with supply chains linked to EU member states, designed to work concurrently. Non-EU companies can build trust with EU consumers by conducting their own supply chain due diligence. In light of the ongoing debate over these regulations, this article presents an overview of the current status and basic components of these proposed laws, as well as the topics that should most concern us.

The CSDDD compromises: a short commentary

Political discourse entails creating compromises. The problem with the current CSDDD compromise is that it builds on an already agreed-upon compromise. The deal today may prevent a directive from being rejected entirely, as it acknowledges the necessity of crossing the finish line and addressing corporate lobbying and political gaming.

The Directive will apply to fewer EU and non-EU enterprises, with a scope of 1,000 people and a turnover of EUR 300 million. The high-risk sector strategy has been removed, but it may be reintroduced later. The revisions lessen the CSDDD’s application, but not to the point where the directive becomes meaningless. The ultimate compromise is more workable, but it may eliminate many companies that do not undertake due diligence. The agreement calls for a gradual phase-in of the CSDDD, with enterprises with more than 5,000 employees needing to comply after three years and those with 3,000 to 1,000 after four and five years, respectively.

The CSDDD agreement is likely to be negotiated in order to gain the support of France and Italy, both of which have considerable population-weighted Council votes. Germany’s fundamental objection to the Directive, which is characterized by bureaucracy and competitiveness concerns, is difficult to resolve by compromise. As a result, the moniker “German Vote” in the Council, coined during Merkel’s tenure, is likely to persist.

The Interplay of the CSDDD with the CSRD

Why the need for two directives? The CSDD and CSRD are designed for corporate entities to be implemented in tandem. The CSRD is the main sustainability reporting method that requires firms to assess supplier chain human rights and environmental impacts. Both directives aim to reduce social and environmental impacts of business operations and increase transparency, following OECD Guidelines, UN Guiding Principles, and the Paris Agreement, but differ in their intended outcomes. The CSRD standardises sustainability reporting and increases transparency for external stakeholders. It sets a clear framework for disclosures and requires assurance assessments. The CSDDD mandates companies to improve their sustainability performance and supply chains, aiming to identify and mitigate harmful impacts.

The EU-CSDDD and CRSD limitations are crucial in ensuring the safety and efficiency of the supply chain.

This section highlights why some measures or provisions in the relevant EU initiatives are ill-conceived or inconsistent. Critics of the CSDD claim the Directive will be limited in impact if it only applies, as the current proposal suggests, instead of the full spectrum of a company’s supply chain. The proposed CSDD Directive has a weak provision stating that directors should consider sustainability matters, including human rights, climate change, and the environment, in their decision-making process. This provision is a clarification and does not require changing national corporate structures.

However, some have accused the CSRD of neglecting gender aspects of due diligence, despite the fact that research reveals that women and girls are disproportionately affected by poor business results. Suggesting that perhaps including a gender lens component could rectify this issue.

The CSDDD lacks the regulatory capacity and mandate to reform local legal systems in third-world nations. In that respect, it should not be considered a threat to territorial sovereignty but rather a response to the global character of supply chains and the global consequences of business. The EU’s legal and non-legal framework is crucial for considering a scheme like this, as directors’ duties are often vague and rarely enforced due to low litigation rates, class actions, and the prohibition on contingency fees in most Member States.

The CSRD extends disclosure requirements to major private corporations, but its viability is dubious. Member states with a large number of private enterprises may be able to reduce the proposed requirements. The industry may also advocate for a light- or no-touch attitude toward private enterprises. The German industry lobby, the Bundesverband der Deutschen Industrie (BDI), opposed the extension, citing the fact that 15,000 previously unreported enterprises will now be subject to additional reporting requirements. The “new normal” of corporate hard law duties necessitates that businesses and investors actively prepare by developing and maintaining effective human rights and environmental due diligence procedures, exposing them to increasing risks and liabilities.

Where are we now?

Both initiatives demonstrate the translation of “soft law” in the realms of business and human rights into hard law. This translation involves the establishment of obligatory corporate commitments that are legally enforceable and may result in penalties such as sanctions or fines in the event that violations are uncovered. The CSDD is far from a silver bullet. But that was never the objective. The CSDDD is an essential instrument for empowering states, local governments, stakeholders, and investors to hold firms accountable for their long-term impact on supply chains. Due diligence and environmentally responsible procedures are important to us, and we must also be concerned with ensuring that the CSDDD functions as it was designed to. The directive has managed to find a unique balance between ambition and pragmatism, which is the brief disclaimer of this post. This is because the CSDDD is getting closer and closer to the point where it will receive its final political approval.

As a result, the efficiency of enforcement and the response of non-EU enterprises to their inclusion will determine the positive impact of CSDDD. Businesses from all over the world commonly assert that a commitment to sustainability is at the core of their business strategy and the process of creating value for their customers. In the course of the CSDD’s development over the next three years, the CSDDD challenges them to make certain that their actions are consistent with the claims they have made.