Corporate Sustainability Due Diligence Directive (CSDD): A New Paradigm for Corporate Responsibility

Publication date: May 20, 2024

In the face of a dynamically evolving global business landscape, the European Union is entering a new stage of reforms, moving towards a more sustainable and ethical model of economic development. The planned Corporate Sustainability Due Diligence Directive (CSDD) is an important legal act that will introduce the foundations for a new paradigm of business responsibility. On 24 April 2024, the European Parliament adopted the CSDDD compromise proposal in a plenary vote. The final adoption and announcement of the text of the directive in the wording adopted by the EP and after changes resulting from linguistic and legal verification is planned in the coming weeks.

The announced adoption of the CSDD directive will culminate an approximately four-year process of developing regulations.

The task of CSDD is to create a comprehensive supervision mechanism requiring companies to analyze and assess the impact of their operations on the three pillars of sustainable development: economic, social and environmental. This innovative directive, an expression of Europe’s commitment to global challenges, covers a wide range of areas, from environmental protection to human rights, with particular emphasis on the integrity of the supply chain.

One of the key aspects of CSDD is the application of the principle of due diligence, requiring companies to identify, monitor and manage the risks associated with their activities. This not only means setting more stringent standards for businesses, but also introducing a harmonized approach, eliminating regulatory gaps between Member States. This directive is gaining importance in the context of growing public expectations of transparency and ethical business conduct. Enterprises face the challenge of not only adapting their practices to CSDD standards, but also redefining their role as active participants in shaping a sustainable future.

Sanctions and Opportunities for Enterprises

The CSDD covers a wide range of businesses, both large corporations and smaller companies. Companies that employ more than 500 employees and whose global net sales revenue exceeds EUR 150 million are considered “large enterprises”. For non-EU companies, the directive will apply if their revenues in the EU reach more than EUR 150 million three years after the entry into force of the act. The Commission will have to publish a list of non-EU companies covered by the directive. The introduction of these regulations marks a new era in the approach to business, drawing attention to the social and ecological responsibility of enterprises as an integral element of economic success in the 21st century. The Council’s general approach introduced a gradual approach to the application of the principles set out in the Directive (Article 30 on transposition). The rules would first apply, 3 years after the entry into force of the directive, to the largest EU companies that employ more than 1,000 employees and have EUR 300 million of global net turnover, and in the case of non-EU companies, EUR 300 million of net turnover generated in the EU. After 4 and 5 years from the entry into force of the directive, the provisions would cover subsequent groups of enterprises. Small and medium-sized enterprises will not be directly covered by the proposed regulations, but the entry into force of the directive will also have an impact on the SME sector.

The CSDD has important legal and financial implications by introducing sanctions for companies that do not comply with the rules contained in the directive. If the provisions of the CSDD are not properly complied with, companies may be exposed to financial sanctions. The amount of penalties depends on the degree of violation and the scale of damage caused by a given company. In addition, it is possible to impose sanctions on companies that do not provide the required reports or do not properly monitor their activities.

However, at the same time, it represents an opportunity for companies determined to lead in the area of sustainable development, opening up new market opportunities for them and strengthening their position in the eyes of customers and investors. The introduction of the CSDD Directive enters an era in which business is not only a profit creator, but also an advocate of social and ecological sustainability. This is an expression of Europe’s ambition to build an economy that not only prospers economically, but also harmonizes with social values, obliging companies to actively engage in shaping a better tomorrow.

Drawing of the New Order of Business Responsibility

The Corporate Sustainability Due Diligence Directive (CSDD) precisely defines the scope of its impact, paving the way for revolutionary changes in business practices. The central point of the regulation is the introduction of the principle according to which enterprises must carefully analyze, monitor and manage the potential negative impacts of their activities.

Environmental Protection: CSDD requires companies to identify and minimize negative impacts on the environment. These activities include aspects related to greenhouse gas emissions, natural resource consumption, waste management and overall ecological responsibility.

Human Rights: The Directive provides for a detailed analysis of the impact of companies on human rights, both in the context of their own employees and those in their supply chain. Enterprises must respect employees’ rights, eliminating practices related to exploitation, discrimination and unsafe working conditions.

Supply Chain: CSDD emphasizes transparency and control in the supply chain. Companies are obliged to monitor the activities of their suppliers, checking whether they comply with established sustainability standards, which include social, environmental and ethical aspects.

Other Aspects of Sustainable Development: The directive also takes into account other aspects of sustainable development, such as the fight against corruption, the promotion of gender equality and the improvement of social conditions in places of business.

As for obligations of enterprises in accordance with the assumptions of the draft directive, enterprises will be obliged to, among others:

incorporating due diligence into corporate policy and risk management (Article 5),

identifying and prioritizing actual and potential negative impacts (Article 6),

preventing potential negative effects (Article 7),

suspension of actual negative effects (Article 8),

implementation of complaint procedures enabling the submission of complaints in the event of justified concerns about the actual or potential negative effects of enterprises’ activities on respect for human rights and environmental issues in the main activities of enterprises, the activities of their subsidiaries and in their activities (Article 9),

publishing on its website an annual report on matters covered by the Directive (Article 11),

bearing liability for damage that arises as a result of the negative effects of enterprises’ activities, including civil liability of enterprises (Article 22).

According to the directive, Member States will implement a number of actions in support of the directive, such as dedicated websites, platforms or portals to provide information to companies and partners with whom they have ongoing business relationships within supply chains and support them in their efforts to fulfilling the obligations arising from this Directive.

Transformation of the Financial Sector in the Light of the CSDD Directive: New Challenges and Prospects

The financial sector, a key player in the global economy, is in an era of disruption where sustainability is becoming an integral part of strategy and operations. In the context of the planned Directive, the financial sector is entering a new era where social and environmental responsibility becomes an integral element of investment strategies as well as the regulatory landscape. The CSDD directive places the financial sector as a key ally in achieving the goals. Banks, investment companies, as well as other financial institutions are obliged to comply with the rules and are bound by human rights in the process of making investment decisions. For the financial sector, this means the need to carefully assess the risk associated with the investment portfolio in terms of sustainable development.

Environmental, Social, and Governance

The concept of ESG (Environmental, Social, and Governance) is becoming one of the key elements of the investment strategies of financial institutions. The introduction of the CSDD Directive requires financial companies to incorporate ESG criteria into their analyzes and risk assessments, and to actively engage with companies to improve their sustainability practices. This is not only a new requirement, but also an opportunity for the financial sector to play an active role in shaping the future of an economy based on sustainable development. The financial sector, as a key mediator between investors and businesses, is also obliged to facilitate transparency and reporting. The introduction of the CSDD Directive obliges financial institutions to provide clients and investors with detailed information on what ESG criteria are used during the investment process and what the efficiency results of these activities are.

However, the financial sector also faces challenges, especially in the context of the need to adapt its business models to new regulations and search for innovative financial solutions. However, the shift towards more sustainable financial products and investments focused on social and ecological goals creates opportunities to build a more durable and stable financial sector. As a result, the financial sector, subject to the influence of the CSDD Directive, not only fulfills its traditional roles, but also becomes a key player in the transformation of the economy towards a more ethical future.

The Role of State Supervision in the Context of the CSDD Directive: Ensuring Compliance and Implementing Changes

The Corporate Sustainability Due Diligence Directive not only sets new standards for companies, but also assigns the state a key supervisory role. State supervisory authorities gain a key position in monitoring companies’ compliance with the provisions of the directive, as well as in enforcing necessary changes in business practices. State supervision is intended not only to check whether enterprises comply with the principles of due diligence, but also to coordinate inter-sectoral activities in order to effectively enforce regulations. The state plays a key arbiter, striking a balance between business ambitions and sustainable development imperatives.

Additionally, regulators play an educational role, supporting companies in understanding and implementing CSDD requirements. Collaboration with enterprises is becoming crucial to effectively adapt business practices to new standards, as well as to facilitate their use of available tools and resources supporting sustainable development. State supervision, as the guardian of compliance with the directive, is also entitled to impose sanctions on companies that do not comply with the requirements of the CSDD. These sanctions include not only financial penalties, but may also involve other measures designed to correct current business practices.

Member States will also be obliged to appoint appropriate supervisory authorities (Article 17), which will be able, among others, to: (Article 18):

initiate ex officio explanatory proceedings,

carry out inspections,

set appropriate deadlines for enterprises to take remedial actions,

order an end to infringements of national provisions adopted pursuant to the directive, refrain from repeating the conduct in question and take remedial action,

impose fines on companies (Article 20).

Technological Innovation as a Tool for Improving Transparency and Business Responsibility:

The digital era opens up new opportunities for businesses to improve transparency and business accountability. The implementation of innovative technologies enables close monitoring of the company’s activities at every stage of the supply chain, from production to distribution. Blockchain-based solutions, for example, can provide secure and immutable records of activities, eliminating the risk of forgeries or irregularities. Artificial intelligence, in turn, can support the analysis of environmental impact data, which enables better decision-making in line with sustainability criteria. In this way, companies not only meet the requirements of the CSDD directive, but also become precursors of modern business practices, strengthening their position on the market and gaining the trust of customers and investors.