Another EU decision was issued in late April that clearly shows that the EU intends to implement sustainability rules at a rapid rate and that the trend is moving away from requirements for reporting and data collection towards stricter legislation which influences action. This time, the European Parliament’s Legal Affairs Committee has voted in favour of the draft Corporate Sustainability Due Diligence Directive (“CSDD”) by a large majority. The introduction of the CSDD will mean greater responsibility for sustainability for companies throughout the value chain. The European Parliament is scheduled to vote on the CSDD in early summer.
The proposed CSDD Directive means that the companies affected will be required to identify and, whenever necessary, guard against, prevent, cease or mitigate adverse effects on human rights and/or the environment caused by their activities and also the activities of their business partners. Read more about the CSDD in our previous article here.
The draft voted on by the Legal Affairs Committee tightens up the draft previously presented by the European Commission and mainly means that:
- More companies will be subject to the rules. It is proposed that the rules should also apply to EU-based companies with more than 250 employees and worldwide total sales of over 40 million euro as well as parent companies with more than 500 employees and worldwide total sales of over 150 million euro. According to the draft, the rules will also apply to companies outside the EU with total sales of over 150 million euro if at least 40 million euro was generated in the EU.
- Supervision and sanctions. Companies that fail to meet requirements under the CSDD risk fines of a minimum of 5 per cent of their global net sales. Supervisory authorities will be able to impose sanctions and companies may also risk liability for damages. Third-country companies that fail to comply with the rules will be prohibited from participating in public procurements.
- The legislation will apply to child labour, slavery, labour exploitation and pollutants.
- Obligations for company managements. Company managements will be required to implement a transitional plan which is consistent with the global warming ceiling of 1.5°C. It is proposed that in companies with more than 1,000 employees, the management should be directly liable, which in turn may affect variable salary components such as bonuses.
The fact that more companies will be subject to the rules means that more companies will evaluate their business partners by means of due diligence in the value chain. Not only suppliers are included. The value chain also includes sales, distribution, deliveries and transport.
When the European Parliament has adopted its mandate in a plenary sitting, negotiations with the Council on the final text of the legislation can begin. The provisional date of the plenary sitting is set for 31 May 2023. The requirements will begin to apply after that.
Prepare your business for any changes in connection with the CSDD
Companies that will be subject to the CSDD should already be evaluating their current sustainability strategies and risk management processes in order to prepare their business for the transition to the new requirements. As part of that preparatory work, it is important to identify possible adverse consequences for human rights and the environment throughout the value chain. However, that is not sufficient and companies that wish to ensure sustainability throughout their value chain must also ensure that these matters are adequately addressed through agreements and monitoring processes. We therefore recommend that companies review and update their agreements before the CSDD enters into force. This can be done, for example, at the moment when an agreement is renegotiated or renewed.
Although smaller companies are not directly affected by the requirements of the CSDD, they must ensure that their business and value chains meet these requirements and also that they are able to report that in a reliable way to larger companies. Otherwise they risk being excluded from larger companies’ value chains. Active, well-documented, long-term sustainability work therefore becomes an increasing competitive advantage for companies of all sizes.
Lindahl is monitoring the development of legislation within the area of sustainability. You are very welcome to contact us if you any have questions or concerns about the new proposal or other questions relating to sustainable business and what your business can do right now.
