Introduction to the European Union Corporate Sustainability Due Diligence Directive: The EU Corporate Sustainability Due Diligence Directive aims to hold large organisations accountable for their impact on the environment and society. This directive requires companies to identify, prevent, and mitigate risks to human rights, the environment, and good governance throughout their supply chains. By implementing due diligence processes, companies are expected to address issues such as child labor, deforestation, and pollution, ultimately promoting sustainability and corporate responsibility.

Obligations on Large Organisations and Impact on Suppliers: Large organisations are directly responsible for complying with the EU Corporate Sustainability Due Diligence Directive. They are required to conduct risk assessments, establish risk mitigation measures, and monitor the effectiveness of their actions. Additionally, large organisations must ensure that their suppliers, both direct and indirect, adhere to the same sustainability standards. This means that all suppliers in the extended supply chain, regardless of their size, will be affected by the directive and must align with the sustainability goals set forth by the EU.

Implications for Suppliers in the Extended Supply Chain: For suppliers in the extended supply chain, the EU Corporate Sustainability Due Diligence Directive presents both challenges and opportunities. While complying with the directive may require investments in transparency, traceability, and sustainable practices, it also opens doors to new markets and partnerships. By aligning with the sustainability requirements of large organisations, suppliers can enhance their reputation, reduce risks, and contribute to a more sustainable global economy. Ultimately, the directive encourages collaboration and shared responsibility across the entire supply chain to achieve long-term environmental and social goals.

Corporate sustainability due diligence

Fostering sustainable and responsible corporate behaviour for a just transition towards a sustainable economy.

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On 23 February 2022, the European Commission adopted a proposal for a Directive on corporate sustainability due diligence. On 24 May 2024 the Council of the European Union approved the political agreement, thereby completing the adoption process. The aim of this Directive is to foster sustainable and responsible corporate behaviour in companies’ operations and across their global value chains. The new rules will ensure that companies in scope identify and address adverse human rights and environmental impacts of their actions inside and outside Europe.

What are the benefits of these new rules?

• For citizens
  • Better protection of human rights, including labour rights.
  • Healthier environment for present and future generations, including climate change migration.
  • Increased trust in businesses.
  • More transparency enabling informed choices.
  • Better access to justice for victims. 
• For companies
  • Harmonised legal framework in the EU, creating legal certainty and level playing field.
  • Greater customer trust and employees’ commitment.
  • Better awareness of companies’ negative human rights and environmental impacts, less liability risks.
  • Better risk management, more resilience and increased competitiveness.
  • Increased attractiveness for talent, sustainability-oriented investors and public procurers.
  • Increased incentives for innovation.
  • Better access to finance.
• For developing countries
  • Better protection of human rights and the environment.
  • Sustainable investment, capacity building and support for value chain companies.
  • Improved sustainability-related practices.
  • Increased take-up of international standards.
  • Improved living conditions for people.

What are the obligations for companies?

• This Directive establishes a corporate due diligence duty. The core elements of this duty are identifying and addressing potential and actual adverse human rights and environmental impacts in the company’s own operations, their subsidiaries and, where related to their value chain(s), those of their business partners. In addition, the Directive sets out an obligation for large companies to adopt and put into effect, through best efforts, a transition plan for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement as well as intermediate targets under the European Climate Law.

Which companies will the new EU rules apply to?

• Companies
• Large EU limited liability companies & partnerships: 
• +/- 6,000 companies - >1000 employees and >EUR 450 million turnover (net) worldwide.
•  
• Large non–EU companies: 
• +/- 900 companies - > EUR 450 million turnover (net) in EU.
• The Directive contains provisions to facilitate compliance and limit the burden on companies, both in scope and in the value chain.
• SMEs 
• Micro companies and SMEs are not covered by the proposed rules. However, the Directive provides supporting and protective measures for SMEs, which could be indirectly affected as business partners in value chains.

What are the estimated costs of the new rules for companies?

Businesses will have to bear:

• The costs of establishing and operating the due diligence process.
• Transition costs, including expenditure and investments to adapt a company’s own operations and value chains to comply with the due diligence obligation, if needed. 

How will the new rules be enforced?

The rules on corporate sustainability due diligence will be enforced through:

• Administrative supervision: Member States will designate an authority to supervise and enforce the rules, including through injunctive orders and effective, proportionate and dissuasive penalties (in particular fines). At European level, the Commission will set up a European Network of Supervisory Authorities that will bring together representatives of the national bodies to ensure a coordinated approach.
• Civil liability: Member States will ensure that victims get compensation for damages resulting from an intentional or negligent failure to carry out due diligence.

Why does the EU need to foster sustainable corporate behaviour?

The Directive will contribute to the just transition to a sustainable economy, in which businesses play a key role.

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

A third of companies recognised the need to act and are taking measures to address adverse effects of their actions on human rights or the environment, but progress is slow and uneven. The increasing complexity and global nature of value chains makes it challenging for companies to get reliable information on business partners’ operations. The fragmentation of national rules on corporate, sustainability-related due diligence obligations further slows down 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.

EU rules will provide a uniform legal framework and ensure a level playing field for companies across the EU Single Market. Such rules will also foster international competitiveness, increase innovation and ensure legal certainty for companies addressing sustainability impacts. The Directive will steer businesses towards responsible behaviour and could become a new global standard with regard to mandatory environmental and human rights due diligence. 

What are the next steps?

The Directive will enter into force 20 days after its publication in the Official Journal of the European Union. Member States will have two years to transpose the Directive into national law and communicate the relevant texts to the Commission.

One year later, the rules will start to apply to companies, with a gradual phase-in between 3 and 5 years after entry into force. 

A set of guidelines to be issued by the Commission will help companies to conduct due diligence.

Lesson Summary

The European Union Corporate Sustainability Due Diligence Directive focuses on accountability and sustainability for large organizations by requiring them to mitigate risks and uphold standards throughout their supply chains. Key points include:

• Companies must identify, prevent, and address risks to human rights, environment, and governance.
• Large organizations must conduct risk assessments, implement mitigation measures, and ensure suppliers comply with sustainability standards.
• Suppliers in the extended supply chain face challenges but also opportunities for growth and partnerships by aligning with sustainability goals.

The benefits of the directive include better protection of human rights, a harmonized legal framework in the EU, increased trust in businesses, and improved sustainability practices. Obligations for companies include establishing due diligence processes, addressing adverse impacts, and creating climate change mitigation plans.

• The directive applies to large EU and non-EU companies meeting specific criteria while supporting measures are provided for SMEs.
• Companies will incur costs for due diligence processes and necessary investments for compliance.
• Enforcement will be through administrative supervision, penalties, and civil liability for damages resulting from non-compliance.

The EU aims to foster sustainable corporate behavior with the directive, promoting a just transition to a sustainable economy. The rules are expected to provide a uniform legal framework, increase innovation, and ensure a level playing field within the EU Single Market and internationally. Companies will have time to comply with the directive once it enters into force, supported by guidelines issued by the Commission.