The Corporate Sustainability Due Diligence Directive (CSDDD) was recently approved by the Legal Affairs Committee of the European Parliament, with critics describing the final version as “neutered,” “toothless,” and “watered down.” Despite the compromise from the original proposal, businesses must focus on the significant changes required to comply with the legislation. The directive mandates companies to identify, assess, and address impacts on people and the planet in their supply chain and activities, particularly focusing on pollution, emissions, deforestation, and human rights issues such as child labor. Non-compliance could lead to penalties such as fines and public statements disclosing violations.
The directive applies to companies with over 1,000 employees and revenues of €450 million or more, with a three-to-five-year phased implementation period. While critics argue that the thresholds were increased from the original draft, it does not diminish the importance of sustainability-focused regulations. Similar compromises have occurred with other regulations like the SEC’s climate disclosure rule and the European Green Deal, as regulators negotiate with lobbying groups. The focus should be on the core requirements and implications of the legislation, rather than the perceived weakening of sustainability regulations.
The CSDDD emphasizes corporate transparency throughout the value chain, requiring multinationals to ensure their suppliers, including smaller companies, adhere to the same standards of transparency regarding human rights and environmental impacts. This will lead to challenging conversations with suppliers and the development of new vendor screening processes. The directive also establishes benchmarks for evaluating sustainability risks, providing investors and consumers with more data to assess businesses through a sustainability lens, ultimately linking profitability and growth with environmental and human rights risks.
Furthermore, the regulation includes a requirement for independent third-party verification of compliance, emphasizing transparency and scrutiny within the law’s structure. If introduced a decade ago, the bold intent of such a mandate would have been widely acknowledged. In the current climate, after years of negotiations over the final package and amid ongoing debates on sustainability, there is a level of cynicism among commentators. However, for businesses subject to the regulation, the CSDDD and other sustainability regulations in the U.S. and Europe will have a significant impact, regardless of any watering down that may have occurred during negotiations. Compliance with these regulations is crucial for companies aiming to align with evolving sustainability standards and expectations.
