The EU's Corporate Sustainability Due Diligence Directive: From Disclosure to Prevention of Adverse Sustainability Impacts in Supply Chains

After two unsuccessful attempts, the EU’s Corporate Sustainability Due Diligence Directive (hereinafter, the CSDDD) passed the Council of the EU on 15 March 2024 and then the European Parliament on 24 April 2024. Our new paper analyzes the CSDDD against the background of existing EU sustainability-oriented law and regulation, as well as supply chain regulation in two large EU Member States, namely France and Germany.

The CSDDD in the EU’s ‘Double Materiality’ Framework

The EU acquis distinguishes between sustainability risks and adverse sustainability impacts.

Sustainability risks relate to the internal dimensions of an enterprise, and how changes in environmental and social conditions impact the given enterprise’s business activity, profitability, and risk exposures. For instance, if the sea level rises due to climate change, production facilities close to the sea would require additional safeguards (eg, dams) and/or hedges (ie, bespoke insurance), or may need to be relocated altogether. All such measures come with costs and eat into an enterprise’s profitability. Under traditional corporate law, the board and management of a company must consider these sustainability risks as part of their shareholder-oriented fiduciary duties given that these steps would be indispensable to retaining the firm’s profitability and preventing it from damages.

By contrast, adverse sustainability impacts concern negative externalities and how the firm’s activities affect environmental and social conditions. Some examples of the questions that might be considered here are: (1) How do emissions of gas and liquids from the production site close to the sea impact fish and maritime biodiversity? (2) Are the work and social conditions at a production site in a distant third country consistent with human rights law? (3) Do the firm’s activities advance or hinder the suppliers’ adherence to environmental and social standards including human rights?

Adding a large number of externality-oriented EU legislation in recent years, from ‘blood diamonds’ over ‘conflict minerals’ to certain wood species, the CSDDD aims to reduce negative sustainability impacts in global supply chains with regard to a list of human rights and environmental standards specified in its lengthy Annex I.

Expanding Due Diligence Requirements Towards Environmental Standards and Human Rights

The CSDDD imposes bespoke due diligence requirements to detect potential future or prevent and remediate existing environmental or human rights violations, imposing a rigid set of procedural requirements on companies or groups of companies with at least 1,000 employees and a worldwide turnover of at least EUR 450 million, or that generate licensing income of EUR 22.5 million in conjunction with a minimum turnover of EUR 85 million.

Since a traditional risk management system focuses on the risks that could impact the rentability, profitability, and resilience of the company (ie, so-called internalized risks), human rights violations, environmental damages, and other externalities are integrated into these systems only to the extent that they can lead to costly penalties and sanctions, or reputational damage. By contrast, the CSDDD requires the integration of human rights and environmental factors in the risk management systems of in-scope companies as a primary risk that must be prevented and mitigated. Furthermore, the CSDDD imposes various procedural requirements to engage in communication with representatives of those harmed by the company or its direct and indirect business partners and other stakeholders including NGOs.

These duties are enforced by a combination of public and private law measures, following previous legislation adopted in some Member States, notably France and Germany.

The CSDDD as Legal Transplant

We find that the goals of the Sustainable Finance Disclosure Regulations (SFDR), adopted in 2019, the Taxonomy Regulation, adopted in 2020, the recently adopted Corporate Sustainability Reporting Directive (CSRD) and the CSDDD overlap as all of them concern the externalities listed in Annex I of the CSDDD. Due to a lack of implementing standards, institutional investors cannot yet assess the sustainability data disclosed under the SFDR, Taxonomy Regulation and CSRD nor take it systematically into account in their investment decisions. Achieving the hoped-for sustainability goals by way of disclosure with less intervention intensity than the CSDDD would be the preferable solution to a (somewhat social) market economy.

Further, the CSDDD is a legal transplant combining the principles laid down in the OECD Guidelines for Multinational Enterprises on Responsible Business and those of the UN Guiding Principles on Business and Human Rights, along with elements of French supply chain legislation from 2017 (which relies on a private enforcement model) and the German supply chain law from 2021 (which is based on a public enforcement model). Like all legal transplants, the resulting legal text generally prompts questions about consistency and specifically raises doubts as to whether combining all of the components of a private and a public enforcement model is adequate to counter violations of human rights and environmental standards in global supply chains effectively.

Our paper is structured as follows: Following the introduction in Part A; Part B places the CSDDD in the context of existing approaches to sustainability-oriented law and regulation; Part C discusses the CSDDD’s scope; Part D covers the due diligence duties of in-scope companies under the CSDDD; Part E deals with the requirement of in-scope companies to disclose a transition plan for climate change mitigation; Part F analyzes the CSDDD’s enforcement and liability provisions; and Part G concludes.

The authors’ paper can be accessed here.

Julia Sinnig is a Postdoctoral Researcher at the ADA Chair in Financial Law (inclusive finance) at the University of Luxembourg.

Dirk Zetzsche is Professor of Financial Law and holder of the ADA Chair in Financial Law (inclusive finance) at the University of Luxembourg.