Soon, substantial penalties can be expected for non-compliance with the proposed Corporate Sustainability Due Diligence Directive (“CSDDD”) which oblige companies to implement due diligence processes to address their adverse impact on slavery, child labor, labor exploitation, biodiversity loss, pollution, and environmental degradation.
What is new?
On 23 February 2022, the EU Commission proposed the CSDDD. Later, on 30 November 2022 the EU Council adopted its negotiating position (“general approach”) on the CSDDD. Recently, on 1 June 2023, the European Parliament voted in favor of the proposed CSDDD and adopted its position for negotiations with Member States on rules to integrate human rights and environmental impact into companies’ governance.
Now that the European Parliament has adopted its position, trialogue negotiations between the European Parliament, the EU Commission and the EU Council on the final text of the legislation begins. Member States will then have two years as of the entry into force of the directive to transpose it into national law.
The key points that will be discussed in the negotiation process is (i) which entities that are obligated to comply with the CSDDD; (ii) the scope of the applicable obligations, including the scope of an “established” business relationship and the application of obligations to downstream companies; (iii) the director’s duties; and (iv) the enforcement of the obligations, including, the applicable civil liability rules and sanctions.
What will companies have to do?
According to the proposals, companies will be required to undertake due diligence to identify, and where necessary also prevent, end, or mitigate the negative impact of their activities on human rights and the environment such as on slavery, child labor, labor exploitation, environmental degradation, pollution, and biodiversity loss. Companies will also have to monitor and assess the impact of their value-chain partners including, for example, suppliers, sales, transport, distribution, storage, and waste-management.
Baker McKenzie continues to monitor the adoption and implementation of the CSDDD and advises companies to imminently start creating an understanding of, and acting on, their potential negative environmental and social impacts in light of the CSDDD. Although the proposal is still in early legislative stage, it is clear that the EU Commission, EU Council and EU Parliament all agree that corporate due diligence has an important role to play in sustainability. Companies need to proactively prepare for the changes.
- Don’t wait – plan ahead! These procedures tend to take time. Start now with determining whether the business may fall under the scope.
- Review the company’s risk assessment to identify where the wider business operations might be impacted. Make sure to look across the entire value chain/chain of activities, including the subsidiaries.
- Companies may need to implement new or update their current risk management program to better manage the risks related to environmental and human rights issues.