CSDDD Q&A

Our sustainability and supply chain experts address the pressing questions surrounding the EU Corporate Sustainability Due Diligence Directive (CSDDD).

What is the CSDDD?

The CSDDD, also known as CS Triple D or CS3D, requires in-scope EU and non-EU organizations to conduct human rights and environmental due diligence across their operations, subsidiaries and value chains. To comply, organizations must identify, prevent, mitigate and account for negative human rights and environmental impacts.

What is the CSDDD’s purpose?

The CSDDD establishes a corporate due diligence duty. The goal is to foster sustainable and responsible corporate behavior while anchoring human rights and environmental considerations in organizations’ operations and corporate governance. The requirements aim to ensure that businesses address the adverse impacts of their actions, including those in their value chains inside and outside of Europe. This will reduce the risk of such adverse impacts within global value chains.

Who does the CSDDD apply to?

Organizations based in the EU must comply if they have:

• 1,000+ employees
• A EUR 450 million+ net turnover worldwide

Organizations based outside the EU may also need to comply if they do significant business in the EU.

Will the CSDDD impact smaller companies?

The proposed rules do not concern micro companies and small and medium-sized enterprises (SMEs). However, the directive provides supporting and protective measures for SMEs that could be indirectly affected as value chain business partners.

When will the CSDDD apply?

Published in the Official Journal of the EU in July 2024, member states have two years (until July 26, 2026) to transpose the directive into national legislation. When it will apply depends on the organization’s size:

What are the benefits of the CSDDD?

For businesses:

• A harmonized legal framework in the EU, creating legal certainty and a level playing field
• Enhanced customer trust and employee commitment
• Greater awareness of organizations’ negative environmental and human rights impacts
• Better risk management and adaptability
• Increased attractiveness for talent, sustainability-oriented investors and public procedures
• More attention to innovation
• Better access to finance

For citizens:

• Greater protection of human rights, including labor rights
• A healthier environment for current and future generations
• Increased trust in business
• Greater transparency that enables informed choices
• Better access to justice for victims

For developing countries:

• Better protection of human rights and the environment
• Enhanced stakeholder awareness of key sustainability issues
• Sustainable investment
• Improved sustainability-related practices
• Greater take-up of international standards
• Improved living conditions for people

What is the CSDDD’s environmental aspect?

The directive is the first EU legislation to mandate organizations to adopt a climate transition plan and fits with the EU’s Corporate Sustainability Reporting Directive (CSRD) and associated standards. Large companies within the scope must have a plan to ensure that their business strategies are compatible with limiting global warming to 1.5°C, in line with the Paris Agreement and other targets.

What are companies and directors obliged to do?

Organizations must act to prevent or mitigate any potential impacts they identify and end or minimize any real impacts. If an organization fails to comply and damages occur, it might be liable and face financial penalties.

Directors are incentivized to contribute to sustainability and climate change mitigation goals. The directive also introduces duties for the directors of the EU companies covered. These include setting up and overseeing the implementation of due diligence processes and integrating due diligence into the corporate strategy.

In addition, when fulfilling their duty of acting in the company’s best interests, directors must consider the human rights, climate change and environmental consequences of their decisions.

What are the due diligence steps?

There are six steps mirroring those in the Organisation for Economic Cooperation and Development (OECD) Due Diligence Guidance for Responsible Business Conduct:

1. Adopt a due diligence policy that outlines the organization’s approach to due diligence and a code of conduct. Update these annually and integrate them into corporate policies
2. Identify potential and real adverse human rights and environmental impacts from its operations, subsidiaries and value chain’s direct and indirect business relationships
3. Prevent or mitigate potential and/or minimize real adverse impacts. Develop and implement a preventative action plan, gain contractual assurances from business partners, make necessary investments and support SMEs. Terminate business ties, if needed
4. Create a complaints procedure that enables affected people and organizations to submit complaints concerning real or potential adverse impacts
5. Periodically assess the implementation and effectiveness of due diligence measures. This should be at least every 12 months or after a significant change
6. Organizations in the CSRD’s scope must communicate relevant due diligence information through their annual reports. Companies not subject to the CSRD must publish an annual statement on their websites

For step 3, businesses must verify that their direct and indirect business partners comply with the steps and actions in their contractual assurances. Organizations can utilize an independent third party or industry initiative to carry out the verification.

If organizations see potential and/or real adverse impacts in their value chains, they are encouraged to engage with their value chains to prevent and mitigate potential adverse impacts and/or minimize and end real adverse impacts.

Organizations are discouraged from terminating business relationships when adverse impacts materialize unless it is only temporary or a last resort.

How will the new rules be enforced?

The CSDDD will be enforced through administrative and civil liability. EU member states will designate authorities to supervise and impose sanctions, including fines of at least 5% of global net turnover.

Administrative supervision:

Member states must designate national supervisors to ensure enforcement and monitor correct implementation. They can investigate and sanction infringing companies, if required. Sanctions will be effective, proportionate and dissuasive, and based on an organization’s turnover.

At the European level, the European Commission will set up a European Network of Supervisory Authorities to unite representatives from national bodies to ensure a coordinated approach.

Civil liability:

Member states will ensure victims receive compensation for damages caused by intentional and negligent failure to conduct due diligence.

What are the penalties for breaching the CSDDD?

Organizations are liable for damages if they fail to prevent potential and/or actual adverse impacts, or adverse impacts that occurred as a result, which led to damages. Affected persons can bring forward action and claim compensation.

At European level, supervisory authorities will ensure coordinated enforcement. They can initiate investigations and inspections if there is sufficient indication of company breaches. Administrative sanctions could be enforced, with fines of at least 5% of the company’s global net turnover in the last financial year.

What are the cost implications of the new rules for companies?

Businesses will have to bear:

• The costs of establishing and operating the due diligence procedures
• Transition costs, including the expenditure and investments to change the company’s operations and value chains to comply with the due diligence obligation, if needed

Why did the EU pursue the directive?

Many stakeholder groups, including civil society representatives, EU citizens, businesses and business associations, have been calling for mandatory due diligence rules. 70% of the businesses who responded to a public consultation sent a clear message – EU action on corporate sustainability due diligence is needed.

Businesses play a key role in creating a sustainable and fair economy and society. A third of companies recognize the need to address the adverse effects of their actions on human rights or the environment, but progress is slow and uneven.

Increasingly complex and global supply chains make it challenging for companies to get reliable information on suppliers’ operations. Fragmented national rules on corporate, sustainability-related due diligence obligations further slow the take-up of good practices. Stand-alone measures by some member states are not enough to help companies exploit their full potential and act sustainably.

What is the history of the CSDDD?

• February 23, 2022: the European Commission submitted a proposal for the directive to the European Parliament
• December 1, 2022: the European Council adopted its general approach to the directive
• December 14, 2023: The Council and Parliament reached a provisional agreement
• May 24, 2024: The Council gave its final approval to the CSDDD
• July 5, 2024: The CSDDD was published in the Official Journal of the EU. Member states have two years (until July 26, 2026) to transpose the directive

How can SGS help?

Combining over 30 years of sustainability leadership with decades of supply chain assurance expertise, we provide in-depth CSDDD support and verification, whether you are taking your first steps or closer to your end goals.

Our global network of sustainability, environmental and human rights experts offers detailed mapping, on-site verification and report assurance, including:

• Reviewing your CSDDD compliance, pinpointing strengths and weaknesses
• Objectively assessing your compliance with all relevant human rights and environmental practices
• Evaluating key parts of your chain of activities to help you prevent and eradicate key issues
• Supporting you to avoid costly penalties and sanctions

Whatever your CSDDD maturity level, we will consider the timeline and resources needed to achieve your goals.

Comprehensive CSDDD services

Contact us today to discuss your CSDDD needs.

For further information, please contact:

Johanna Lanza
Global Business Development Director
Responsible Business Services (RBS)
SGS
t: +1 862 246 3852