Guidance on recent EU climate legislation: Breaking down the CSDDD

The European Union announced the Corporate Sustainability Due Diligence Directive (CSDDD) on July 5th, 2024. 
The EU is committed to core values like human dignity, democracy, and the rule of law. This norm emphasizes environmental sustainability and human rights. The EU aims to integrate these principles into its international actions and policies, particularly in promoting sustainable development in developing countries and ensuring high environmental standards. 

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The Basics

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The text shows how important corporate responsibility is for reaching these goals. This is especially true for human rights and environmental practices. It also references various EU initiatives, communications, and strategies, such as the European Green Deal and the Paris Agreement, which emphasize the role of businesses in driving sustainable growth and mitigating climate change. It aims to establish a legal framework for sustainable corporate governance, including mandatory due diligence, to ensure companies adhere to these standards throughout their global value chains.

The CSDDD was created to make sure companies in the European Union (EU) help with sustainable development. It focuses on both possible and real harm to human rights and the environment. It requires companies to implement due diligence processes across their operations, subsidiaries, and business partners to prevent, mitigate, and remediate these impacts. It also ensures that individuals affected by a company's failure to meet these obligations have access to justice.

Key points include:

1. The Directive does not override existing obligations under other EU laws.
2. It does not apply to certain pension institutions or regulated financial undertakings, focusing instead on companies meeting specific turnover and employee thresholds.
3. Companies need to include due diligence in their policies. They should check and evaluate how well their measures work. If needed, they must offer solutions to fix any issues.
4. Parent companies can fulfill due diligence obligations on behalf of subsidiaries, but subsidiaries remain liable for any damages caused.
5. Business partners are protected from disclosing trade secrets unless essential for compliance.
6. The Directive applies to both EU-based and significant third-country companies with substantial operations in the EU.

The CSDDD aims to hold companies accountable for human rights and environmental effects in their supply chains. It also works with current laws.

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The role of Business and Member States

The text talks about the need for a European Union plan. This plan aims to create responsible and sustainable global value chains. It highlights that companies are important in building a sustainable society and economy. As laws are created in EU Member States, a unified approach is needed. This will help prevent market fragmentation and ensure legal certainty. The Directive encourages Member States to introduce more stringent national laws where needed, particularly in areas like human rights, environmental protection, and civil liability.

The CSDDD aims to cover human rights comprehensively, focusing on adverse impacts resulting from rights abuses and environmental damage. Companies are expected to integrate due diligence into their policies, identify and mitigate risks, and ensure stakeholder engagement. Special attention is given to vulnerable groups and conflict-affected areas. A great thing about the CSDDD is that it also promotes the "One Health" approach, recognizing the interconnectedness of human, animal, and environmental health.

Companies must take "appropriate measures" to address adverse impacts, prioritize the most severe risks, and use their influence to prevent or mitigate harm, even when they are not directly causing it. This rule explains steps for prevention, mitigation, and remediation. It ensures that companies help create a fair and sustainable global value chain.  Some guidelines are provided to accomplish this: 

1. Prevention Measures: Companies should develop prevention action plans and seek contractual assurances from direct business partners to ensure compliance with their codes of conduct. These assurances should extend to the partners' own supply chains, with verification measures in place.
2. Collaboration and Investment: Companies may need to invest financially or non-financially in practices that prevent adverse impacts. They should also collaborate with other entities and adjust business practices to support living wages, fair incomes, and environmentally responsible operations.
3. Dealing with SMEs: Special support should help small and medium-sized enterprises (SMEs) in the supply chain. This is important, especially when compliance could harm their survival. Support could include financing, training, or capacity-building.
4. Addressing Adverse Impacts: If adverse impacts occur, companies must work to end or minimize them, potentially requiring contractual assurances and collaboration with business partners. If prevention fails, companies may need to suspend or terminate business relationships, prioritizing engagement over termination.
5. Remediation: Companies causing or contributing to adverse impacts must provide remediation, including financial or non-financial compensation. If a company fails to remediate, authorities may intervene.
6. Complaint Mechanisms: Companies must establish accessible procedures for affected persons and organizations to submit complaints or concerns about potential or actual adverse impacts. These mechanisms should be fair, transparent, and not a prerequisite for legal action.

The CSDDD highlights the importance of careful and responsible business management. This helps prevent harm and ensures accountability in the supply chain.

It also outlines the obligations and expectations for companies regarding the monitoring and implementation of the necessary due diligence measures.  Companies must regularly assess their operations, subsidiaries, and business partners, updating their assessments at least annually or whenever significant changes occur. They should also document their compliance for at least five years.

Companies must share their due diligence efforts publicly. They usually do this through an annual statement. This is required unless they follow other reporting rules. The text underscores the importance of stakeholder engagement in the due diligence process and the need for meaningful interaction with potentially affected groups. The European Commission is encouraged to provide guidelines, tools, and support to help companies, especially SMEs, comply with these obligations.

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The Wrap-Up

1. Obligations: Companies must address actual and potential adverse impacts on human rights and the environment within their operations, subsidiaries, and business partners.
2. Liability: Companies are liable for violations of these obligations.
3. Climate Transition Plan: Companies must adopt plans to align their business strategies with climate goals, specifically limiting global warming to 1.5°C as per the Paris Agreement.
4. Scope: The Directive applies to large companies, both EU-based and non-EU-based, meeting certain employee and financial thresholds. It also applies to companies involved in franchising or licensing agreements in the EU.
5. Exemptions: Some companies, like holding companies without direct management roles, may be exempt, but must designate a subsidiary to fulfill obligations.
6. Consistency: The Directive does not lower existing protections for human rights, employment, social rights, environmental or climate protections under national or EU law.
7. Definitions: Various terms such as "adverse impact," "subsidiary," "business partner," and others are clearly defined.
8. Due Diligence: Companies are required to conduct risk-based human rights and environmental due diligence, including identifying risks, preventing harm, providing remediation, and engaging with stakeholders.
9. Harmonization: Member States must align their national laws with the Directive, but can introduce more stringent provisions for greater protection.

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The CSDDD promotes using digital tools for due diligence. It also encourages the Commission to help companies implement these measures. Lastly, it highlights the importance of a transition plan for climate change mitigation, ensuring that companies' operations align with global climate goals. It ultimately sets out a framework for the oversight and enforcement of these obligations, requiring companies, including third-country companies, to designate authorized representatives within the EU for effective enforcement.

The responsibilities of Member States in enforcing legislation related to due diligence is stated, too. It calls attention to the need for penalties that are dissuasive, proportionate, and effective, including financial penalties and public disclosure of violations. The CSDDD calls for coordination among national supervisory authorities, with the establishment of a European Network to ensure consistent enforcement across the EU.

The text also discusses the civil liability of companies, requiring Member States to establish rules for compensating victims when a company fails to prevent or mitigate adverse impacts. It specifies that companies should be held liable for damages caused by negligence or intentional failure to address such impacts. However, it distinguishes between direct and indirect victims, limiting claims to those directly affected.

Furthermore, the CSDDD addresses procedural aspects, such as the disclosure of evidence in court and the role of third parties (like NGOs) in representing victims. It also outlines conditions for the civil liability regime, including a minimum limitation period of five years for bringing claims and provisions for injunctive measures.

Finally, the text underscores the importance of transparency and data protection in its implementation and mandates regular reporting by the Commission on the Directive's effectiveness. It makes sure that it does not reduce current protections in EU Member States. It also allows for stricter national laws.  The ultimate goal is to harmonize sustainability practices across the EU, preventing market fragmentation and ensuring that companies contribute to sustainable development.

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