CSDDD has come one step closer: An update for EU and non-EU businesses

Dr. Sebastian Klotz
Manager, Sustainability and Digital Technology, PwC Switzerland

Alessandra Giacomello
Senior Associate, Strategic Regulatory & Sustainability Services, PwC Switzerland

The Corporate Sustainability Due Diligence Directive (CSDDD) has taken another important step towards becoming a reality. While it is a European Union (EU) initiative, CSDDD will also apply to non-EU businesses of a certain size and with a certain financial net turnover in the EU. Businesses will be required to identify, prevent, end, or mitigate the negative impact of their – and their value-chain partners’ – activities on human rights and the environment. Here is what you need to know – and to do.

On 1 June 2023, the European Parliament adopted its first reading position on CSDDD. This follows the publication of the proposal by the European Commission on 23 February 2022, and the publication by the Council of the European Union of its “General Approach” on 1 December 2022, which conveyed to the Parliament its position on the legislative proposal submitted by the Commission. While there are many commonalities, there are also considerable differences between the published positions that can have a significant impact on businesses. This blog post highlights some of these features that will be subject to the upcoming negotiations between the Parliament and the EU Member States. The EU aims to formally adopt CSDDD before the upcoming European elections in June 2024.

The European Green Deal aims to make Europe the first climate-neutral continent by 2050. By 2030 already, the EU wants to have reduced net greenhouse gas emissions by at least 55% (Fit-for-55). But sustainability goes beyond environmental (E) concerns – it also relates closely to social (S) and governance (G) topics, commonly referred to ESG¹.

CSDDD goes into this direction as its aim is to reduce the negative impact of businesses’ activities on both the environment and human rights. More precisely, CSDDD will require businesses to

Integrate due diligence into their policies (and risk management systems)
Identify actual or potential adverse impacts
Prevent and mitigate potential adverse impacts, and bring actual adverse impacts to an end and minimise their extent
Establish and maintain a complaints procedure
Monitor the effectiveness of their due diligence policy and measures
Publicly communicate on due diligence

A selection of the relevant topics for due diligence includes child labour, slavery, labour exploitation, pollution, environmental degradation, and biodiversity loss. Importantly, businesses will be required to work closely with their value-chain partners including suppliers, sale, distribution, transport, storage, waste-management and other areas.

_{¹For one of our recent publications on «Unpacking the «S» in ESG reporting», please see here.}

Will CSDDD apply to your business?

Whether or not a business will be subject to CSDDD depends on a number of factors that will be subject to the upcoming negotiations between the Parliament and the EU Member States. Broadly speaking, these factors include the business’ number of employees, the business’ net worldwide turnover, the business’ net EU turnover, and the sector in which the business operates. Once CSDDD is adopted and transposed into EU Member States’ national laws (transposition within two years), the scope of CSDDD will increase year by year. While only large businesses, in the sense of employees and/or net turnover, will fall under CSDDD in the beginning, smaller businesses will have to comply with CSDDD five years after its adoption. As indicated below, the employee and net turnover thresholds vary for EU and non-EU businesses and between the Commission, Council, and Parliament proposals.

See the infographic here

Besides these large differences, there are also small differences that can have a huge impact on businesses. For example, for the calculation of the employee threshold, the Commission and the Council include part-time employees and temporary agency workers. The Parliament goes one step further and also includes other workers in non-standard forms of employment. For some businesses this may determine whether or not CSDDD is applicable to them.

A corporate responsibility law must ensure that the future lies with companies that treat people and the environment in a healthy way - not with companies that have made a revenue model out of environmental damage and exploitation.

Lara Wolters, European Parliament Rapporteur for CSDDD

Will CSDDD apply to all sectors?

Whether or not CSDDD will apply to all or only selected sectors is likely to be one of the most contentious topics in the upcoming negotiations between the Parliament and the EU Member States. According to the proposals by the Commission and the Council, businesses that do not reach certain thresholds in terms of employees or net turnover may still be subject to CSDDD if they generate at least 50% of their net turnover in certain sectors such as agriculture, chemicals, clothing and footwear, fisheries, food and beverages, forestry, leather, live animals, metal products, mineral products, textiles, and wood. The Parliament, in contrast, is in favour of a CSDDD which applies to businesses regardless of their sector and includes financial services.

Sectors of particular relevance for CSDDD

What are other uncertainties?

Besides the employee and net turnover thresholds as well as the sectors in scope, there are a number of topics that will be subject to the upcoming negotiations between the Parliament and the EU Member States. One such topic is sanctions / penalties. In all three proposals, sanctions / penalties are to be decided by the respective EU Member State and shall be effective, proportionate, and dissuasive. The Commission calls for sanctions to be based on the business’ turnover. In addition, Member States will be required to publish any breaches of CSDDD. The Council’s proposal clarifies that pecuniary penalties are to be based on a business’ worldwide net turnover and that infringements of CSDDD will be required to be publicly available for at least three years. The Parliament goes beyond this and calls for at least the following measures and sanctions to be provided for

pecuniary sanctions
a public statement indicating that a company is responsible and the nature of the infringement
the obligation to perform an action, including to cease the conduct constituting the infringement and to desist from any repetition of that conduct
the suspension of products from free circulation or export

Other contentious topics include, but are not limited to, business directors’ duty of care, the scope of the value-chain activities to be covered, civil liability, and access to justice. The negotiations on these topics will commence now under the Swedish presidency of the Council but reach far into the Spanish presidency starting on 1 July 2023. The EU aims to formally adopt CSDDD before the next European elections, which have recently been confirmed to take place between 6 and 9 June 2024.

What should you do next?

Given the remaining uncertainties on CSDDD, we encourage businesses inside and outside the EU to closely monitor the regulatory developments. Regardless of the final details of CSDDD, however, it is safe to say that businesses will be required to collect, to report, and to act on a large amount of data on their – and their value-chain partners’ – activities. According to the Parliament’s proposal, this data will not only be reported to the relevant authorities but also be accessible to investors in the European Single Access Point.

Business should start now to assess the availability and reliability of relevant data in accordance with other existing or upcoming sustainability-related regulations on specific topics (e.g. conflict minerals, forced labour, deforestation-free supply chains), which already have a strong due diligence component. The CSDDD being a horizontal framework, it will support companies in meeting such other due diligence obligations, and to link such efforts with sustainability reporting duties stemming from the Corporate Sustainability Reporting Directive (CSRD).

We are happy to support you on this journey towards a sustainable business and value chain.

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