Corporate sustainability due diligence: Why the finish line is just the beginning of the race

Herbert Smith Freehills’ Crockett and Bille look at the implications of the delayed CSDDD vote and why there will be no second chances for firms to comply

Anthony Crockett and Jannis Bille


Anthony Crockett, partner and Jannis Bille, senior associate, Herbert Smith Freehills’ ESG practice

It’s little over a month since provisional agreement was reached on the text of the highly anticipated Corporate Sustainability Due Diligence Directive (CSDDD).

Since then, the pace quickened, with the EU releasing a final draft in the past few days, in anticipation of a ratification vote, only to have the brakes applied after Estonia, Finland, Germany and Italy signalled their intention to abstain.

At face value it seems that there are concerted efforts to prevent CSDDD from seeing the light of day. Yet it is not that simple as the vote is now likely to take place after further negotiations, next week. But after so much talk and anticipation, what does it all add up to?

In simple terms, if adopted, CSDDD would impose obligations to carry out due diligence on large companies relating to both actual and potential adverse impacts on the environment and human rights. It will not matter whether these arise from their own actions, those of their subsidiaries or even business partners.

Of course, nothing is ever that simple.

For one thing, the CSDDD journey will not be completed until the requirements are fully embedded into individual States’ laws. There is, of course, an advantage in getting a head start; yet even for those who have already begun to make changes, organisations should be under no illusion that the work of implementing the requirements is only just beginning.

There may be three years before compliance has to happen – but in that time there will be interpretational challenges along the implementation journey, together with some heavy lift in undertaking gap analyses, renegotiating supplier agreements or upgrading governance frameworks.

See also: – EU missed opportunity for ‘transformative change’ as financial firms excluded from CSDDD

Companies falling under CSDDD’s scope will also have to integrate due diligence into their policies and risk-management processes. By adopting a risk-based approach the regulations will mean companies have to determine where risk is most likely and prioritise remedial action based on severity and likelihood. That way of thinking will ensure directors have to carefully consider matters that go beyond the boundaries of their own organisation; some may already do so, but the directive brings a mandatory element to good practice.

Put another way, relationships, plans and processes that have been in place for years may – even as a last resort – have to be curtailed, if adverse impacts cannot be prevented or brought to an end.

If the ensuing challenges seem daunting, there is some respite. For some. Size matters because for now CSDDD will apply to EU companies with 500+ employees and net worldwide turnover of at least €150m. However, non-EU companies with at least €150m turnover generated in the EU are also captured irrespective of employee numbers and these thresholds for both EU and non-EU companies can also be triggered by parent companies on a consolidated basis.

At the same time, inclusion of the financial services sector has been a particularly controversial point. It appears that financial institutions will fall within CSDDD’s scope but only regarding their own operations and those of upstream business partners, with investment and lending activities being currently excluded from the scope of the due diligence obligations. You would be forgiven for thinking that such an exclusion makes compliance – for some – easier.

Yet, in parallel to these negotiations, several regulatory initiatives are in development across Europe. France and Germany are among the countries considered to be first movers, already having laws in place, with the result that companies will have to understand their obligations across relevant EU member states.

At the same time, if the CSDDD does stall – which clearly remains a real possibility – other may follow the lead set by France and Germany. In other words, it would be a mistake to think that this is a trend to follow. Be in no doubt; environmental and human rights due diligence is – and will remain – a legislative priority.

To demonstrate this point, it is clear that companies failing to comply with CSDDD and failing to pay any fines imposed on them will be subject to several injunctive measures. There is also a risk of civil liability. Under CSDDD, any individual affected by adverse impacts will have no less than five years to bring damages claims. These measures take into consideration the turnover of the company and impose additional financial penalties of up to 5% of the company’s net turnover.

The proposals laid out by Axel Voss may have stretched to 435 pages and it is always true that the devil is in the detail. Yet, there can be no mistaking that this is a loud and clear message. If the proposals are ratified when the vote eventually takes place – and there remains some doubt – it will not signify reaching the finish line. Instead, it will be a point marking the firing of a starting gun, meaning the race will be on for companies to ensure they comply with a new paradigm for human rights and environmental due diligence.

In any other race, false starts lead to a second chance being given. Not this time; for the environment and for companies the risks associated with getting it wrong are severe.


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