CSDDD, explained: the Corporate Sustainability Due Diligence Directive

As sustainability legislation continues to expand across the globe, companies are finding themselves subject to ever-stricter ESG reporting requirements.

The latest in this wave of legislation is the Corporate Sustainability Due Diligence Directive, or CSDDD for short. Approved by the European Commission in March 2024 and currently pending approval by the the European Parliament, the CSDDD is set to have a large impact on businesses – both in the EU and beyond.

Here’s a breakdown of the CSDDD, what it could mean for your business, and how to prepare for compliance.

What is the CSDDD?

The CSDDD is a European Union directive aimed at enhancing the protection of the environment and human rights both within the EU and globally.

It sets obligations for companies to address actual and potential adverse impacts on human rights and the environment, including those related to their own operations, their subsidiaries, and – vitally – their suppliers.

The CSDDD was first adopted by the European Commission in February 2022. In December 2023, a provisional deal outlined the directive’s scope, clarified liabilities for non-compliant companies, defined penalties, and completed the list of rights and prohibitions that companies should respect. It was approved by the European Commission in March 2024 – after undergoing changes that reduced its scope and extended its timeline for implementation – and is currently pending approval by the the European Parliament.

By 2027, companies should be ready to comply with the directive, with larger corporations likely to be the first to adhere.

What the CSDDD means for businesses

Requirements for compliance

The era where businesses could overlook or dismiss their supply chain’s impact is drawing to a close: 

To comply with the CSDDD, companies must identify, prevent, mitigate, and account for negative human rights and environmental impacts within their operations, subsidiaries, and value chain.

The proposed legislation gives business directors specific obligations to integrate due diligence into corporate strategy and consider the human rights, climate change, and environmental consequences of their decisions.

Large companies will also be required to align their business strategies with the Paris Agreement goal of limiting global warming to 1.5 °C  – meaning that these large companies must have a plan for reaching net zero.

Opportunities

The CSDDD should not be viewed solely as a regulatory obligation.

Complying with the directive presents several opportunities to companies, including:

• Enhanced customer trust and employee commitment
• Improved risk management
• Better access to finance

In addition, the directive will establish a harmonized – and ideally easier-to-navigate – legal framework in the EU.

These opportunities provide the “carrot” of business benefits for companies that prepare in advance for CSDDD, alongside the “stick” of non-compliance penalties. 

Which businesses need to comply with CSDDD

Companies based in the EU will need to comply if they meet the following criteria:

• 1,000+ employees
• A net worldwide turnover over €450 million

Companies based in non-EU countries will also likely need to comply with CSDDD, if they do significant business in the EU.

Penalties for non-compliance with CSDDD

The CSDDD will be enforced through administrative supervision and civil liability.

At the state level, EU Member States will designate authorities to supervise and impose sanctions, including fines and compliance orders. 

At the European level, a network of supervisory authorities will ensure coordinated enforcement. Those who are harmed by non-compliant companies will have the right to compensation for damages.

For companies that do not pay fines, the provisional agreement includes injunction measures and considers the company’s turnover when imposing monetary penalties; i.e., up to 5% of the company’s net turnover. Additionally, compliance with the CSDDD may become a criterion for the awarding of public contracts and concessions.

Even businesses not directly subject to the CSDDD may be affected if they have business partners bound by the directive, as they may be required to terminate relationships with partners that have adverse environmental or human rights impacts that cannot be mitigated.

What’s next?

The CSDDD is approved by the European Commission and is currently pending approval by the European Parliament.

Once officially adopted, EU member states will have two years to implement the directive into national law. 

However, as non-compliance could result in significant penalties, companies should already begin preparing to comply with the legislation now.

At Normative, our Climate Strategy Advisors have seen from experience that the sooner a business prepares for upcoming legislation, the smoother the compliance process will be.

This is especially true of legislation which targets the value chain – as the CSDDD does – because modern value chains can have thousands of suppliers scattered all around the globe. Manually parsing these suppliers to collect the needed data would be an enormous task.

Normative’s automated carbon accounting platform accelerates the process of calculating your business’s full climate impact – including that of the suppliers in your value chain. 

Jumpstart your CSDDD compliance by booking a demo of Normative to learn how we can help you stay compliant, competitive, and equipped to reach net zero.