Familiarise yourself with the Corporate Sustainability Due Diligence Directive - the next step in the EU's sustainability agenda

On 24 April 2024, EU Member States passed the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D), a directive that, like the CSRD, is expected to have a major impact on listed companies. In this article, we explore the significance of the directive and how it may affect the operations of Swedish companies.

What is CSDDD?

The CSDDD is the latest directive in the EU's drive for sustainability, collectively known as the Green Deal. The aim of the directive is to ensure that European companies, as well as companies with significant operations within the EU's borders, take responsibility for their social and environmental impacts throughout the value chain. In a nutshell, the CSDDD requires companies to carry out due diligence to identify, prevent and address risks related to negative impacts. Focusing on the value chain, companies need to develop due diligence processes both within their own operations and in relationships with suppliers and downstream actors.

What are the requirements?

The current draft of the CSDD defines due diligence as measures that identify and address adverse impacts on human rights and the environment. Fortunately, it provides a clear framework for how this should be done in practice, based on the OECD Guidelines on Due Diligence for Responsible Business Conduct. The guidelines comprise six steps:

• Integrate due diligence into policies and governance documents
• Identify and assess negative impacts on human rights and the environment
• Preventing, halting or minimising actual or potential adverse impacts on human rights and the environment
• Evaluate and monitor the effectiveness of the measures
• Communicate the measures to relevant stakeholders
• Take mitigation measures if negative effects are detected

To assess the magnitude of the negative impact, companies should consider both its likelihood and severity of impact. The severity is assessed on the basis of scope, scale and irremediability, which is based on the specific context.

The difference between CSDDD, CSRD and the EU taxonomy: New sanctions and behaviour in focus

In recent years, the EU has launched several policy packages to create a sustainable economy, with the Corporate Sustainability Reporting Directive (CSRD) and the EU taxonomy in particular capturing the attention of the capital markets. The CSRD aims to harmonise non-financial reporting among companies and the EU taxonomy creates a common definition for what economic activity is classified as sustainable. What makes the CSDDD unique is that it directly targets companies' behaviour rather than their communication or reporting. Furthermore, it introduces new forms of sanctions for breaches of the directive, which is not the case with the CSRD where national laws determine the scope of sanctions. A company that fails to demonstrate due diligence in relation to its value chain risks heavy fines in the millions, which in addition to their financial impact can be disastrous for the company's reputation. It is up to each member state to determine the exact amount of the penalty, but it will amount to at least 5% of the company's total net turnover in the previous year;

Who is affected by the CSDDD?

The Directive is aimed at large companies with significant activities within the EU. On the one hand, it covers companies incorporated in a Member State, and on the other hand, non-European companies that generate a sufficiently large turnover within the Union. As with the CSRD, both turnover and number of employees determine whether or not a company is covered by the directive, and the EU has published the following delineation:

• Companies with more than 1,000 employees and a turnover of more than €450 million.

• Non-European companies with an EU turnover of more than €450 million.

When will the CSDD enter into force?

As it will be a few years before the CSDDD comes into force, companies will have time to first adapt their reporting to comply with the CSRD. According to the current timetable, the first companies will be affected in 2027 and, as with the CSRD, the largest companies will be the first to be affected. Gradually, more and more companies will be affected by the Directive and, assuming it is implemented as planned, all relevant companies will be required to demonstrate due diligence in the value chain from 2029 onwards;

The Directive affects smaller companies indirectly

Even if a company is not directly affected by the provisions of the CS3D, it may be indirectly affected through relationships with large companies. As customers and suppliers place higher demands on risk management linked to human rights and environmental issues, smaller businesses will need to adapt to avoid losing valuable business relationships. It is through the requirement of due diligence throughout the value chain that the EU is ensuring that the entire economy shifts to more sustainable operations.

The way forward

The approval of the Directive by Member States marked an important step in the implementation of the CSDD, but much remains to be done. Going forward, Member States will transpose the Directive into national laws, which may differ from one another. Only then will the exact scope of sanctions and expectations for companies become clear. But already today, some companies have started to work proactively and have developed due diligence processes. At AVA Corporate Communications, we help you understand how the CSDDD may affect you and assist you in adapting to the new regulations. We have good knowledge of the current frameworks and are well versed in the implementation of the CSRD. Contact us today for more information.