The European Parliament adopted the Corporate Sustainability Due Diligence Directive (the "CSDDD") on 24 April 2024. This is a landmark piece of legislation that aims to ensure companies contribute to sustainable development by identifying, preventing and mitigating potential or actual adverse human rights and environmental impacts in their operations and value chains (see our newsletter of 20 March 2024 for more information). The directive now also needs to be formally endorsed by the Council, signed and published in the EU Official Journal, entering into force twenty days later. Member States must transpose the CSDDD into national law within two years of its entry into force. But companies are well advised to prepare for the new compliance obligations right away.
The new obligations under the CSDDD affect the entire upstream and partially also the downstream chain of activities. This includes subsidiaries as well as direct and indirect business partners of in-scope companies. Thus, besides affecting large companies falling under the scope of the CSDDD, the supply chain provisions also pose major practical and legal challenges for their smaller suppliers and business partners.
In essence, the CSDDD applies to (i) EU companies that have more than 1,000 employees and a net worldwide turnover above EUR 450m as well as (ii) non-EU companies with a turnover of more than EUR 450m in the internal market. The new obligations require far-reaching adjustments to current business operations. In-scope companies should therefore begin to familiarise themselves with the new law and closely follow the implementation process into national jurisdictions.1
In particular, the following measures can already be taken regardless of the national transition of the CSDDD to prepare for the obligations and ensure a "CSDDD-proof" compliance management system:
- Scoping business activities: In-scope companies should already start "scoping" their chain of activities. This includes identifying areas where adverse impacts on human rights and/or the environment are likely to occur and are most severe as well as carrying out detailed assessments of individual suppliers.
- Updating and enhancing compliance management systems: Companies should adopt and regularly update risk-based due diligence policies and integrate due diligence processes within risk management systems and internal controls. In addition, companies should assign clear roles and responsibilities in line with best practice compliance management systems. This also includes monitoring the effectiveness of policies and measures.
- Implementing tailored compliance documentation: It is of utmost importance to adopt compliance-proof documentation outlining the rules and principles that in-scope companies and subsidiaries must adhere to, such as codes of conduct for subsidiaries and/or business partners. Already existing documents need to be reassessed and potentially adjusted.
- Preparing business partners for the new obligations of in-scope companies: Preparing business partners of in-scope companies to play an important role in the upcoming due diligence processes is arguably one of the most delicate aspects. For instance, business partners will need to provide information to in-scope companies. This not only presents commercial challenges but also involves navigating through various legal obstacles, necessitating cautious approaches to avoid collision with other laws (e.g. competition law, data protection, etc.). Both in-scope companies and their business partners should therefore know their duties and obligations under the CSDDD as well as the boundaries of other laws.
- Providing guidance and training: Every successful compliance management system provides for guidance and training of employees. In-scope companies should waste no time in setting up a training programme to create awareness among employees who are in regular contact with suppliers and customers. This includes a "tone from the top" approach that underpins the company's values and ethics.
Companies are advised to seek expert legal advice. Schoenherr's newly formed supply chain compliance taskforce is committed to assisting clients in preparing, implementing and complying with the new supply chain obligations.
Footnote
1. The final text of the CSDDD was not yet available to the authors at the time of publication. The content is based on the press release published by the European Parliament on 24 April 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.