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CSDDD: Where do we go from here?

Learn about the latest CSDDD developments, and find out what happens next.

Update, 15th March 2024:

EU member states on Friday (15th March) have voted in favour of a stripped-down version of CSDDD.

MEPs and government officials struck a tentative deal on the Corporate Sustainability Due Diligence Directive, or CSDDD, in December – but its future was thrown into doubt after last-minute hesitation from Germany and Italy.

Now the measures seem likely to pass into law, after Italy approved a stripped-down version of the legislation at a regular meeting of diplomats in Brussels.

The rules still need to be voted on by MEPs, and April is the last chance for them to do so ahead of June elections. Click here for more detail.

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In light of the latest development in CSDDD’s (Corporate Sustainability Due Diligence Directive) labyrinthine path through the corridors of EU legislation, it seems pertinent to once again re-examine what it is, what its goals are, and what lies ahead now that it failed to achieve final approval by the European Council.

What is CSDDD?

The Corporate Sustainability Due Diligence Directive, more commonly shortened to either CSDDD or CS3D, is a key piece of EU legislation that seeks to set mandatory obligations for companies to address the negative impacts of their supply chains on human rights and the environment.

At its core CSDDD requires due diligence around companies’ business operations and supply chains. That means companies must look at not just who they buy from, but who those supply chain partners buy from as well.

The intention of CSDDD is to build on another EU directive – the Corporate Sustainability Reporting Directive (better known as CSRD) – which covers disclosures and operations. It requires companies to look at their carbon footprint and their impact on human rights and labor laws, among other ESG goals.

In its proposed format, CSDDD is meant to act as an enforcement mechanism for the EU – a vehicle for checking in and ensuring that ESG initiatives are being followed. Hypothetically speaking, if a company claims to make a reduction measure in environmental impacts, CSDDD will ensure that it’s actually being done. Essentially, CSDDD functions as the legal imperative to perform the due diligence, meaning that organizations cannot just create a report and claim adherence.

In tandem with CSRD, CSDDD also supports the due diligence of other regulations and directives, including but not limited to the Global Reporting Initiative, Carbon Disclosure Project and the Sustainable Finance Disclosure Regulation (SFDR).

Under the proposed directive, companies with more than 250 employees and a global turnover of over 40 million euros would be subject to the requirements. This contrasts with the previous draft, which set the limits at 500 employees and 150 million euros. To accommodate different company sizes, staggered transition periods of up to five years are suggested.

What’s the latest development – and what’s happened previously?

Although many assumed that the formal enacting of CSDDD was a foregone conclusion, a significant blow was dealt on 28th February 2024. Despite a provisional agreement having previously been reached by the EU Council and the EU Parliament, the directive failed to achieve final approval following objections from countries including Germany and Italy.

This follows a four-year process to advance the regulation, beginning with studies by the European Commission in 2020, which in turn lead to the Commission’s proposed CSDDD draft in February 2022. That draft set out obligations for companies to identify, assess, prevent, mitigate, address and remedy impacts on people and planet in their upstream supply chain and some downstream activities such as distribution and recycling. On 1st June 2023, the majority of Members of the European Parliament (MEPs) voted in favor of strengthening the original legislative proposal put forth by the EU Commission.

Agreement was reached on CSDDD with the EU Parliament in December 2023, but a vote on its approval in the EU Council was postponed last month after, according to ESG Today, “Germany threatened to not support the regulation on concerns of the bureaucratic and potential legal impact it would have on companies, and [it was] thrown into further doubt when Italy reportedly also subsequently pulled its support.” Recent rumors have also suggested that a last-minute effort by France to significantly scale back the scope of the new rules further scuppered any chance of approval.

What happens now?

Whether CSDDD is dead in the water – as it appears – or whether the recent troubles are something of a political bluff – a strategic move to tease out the opposition – remains to be seen.

After the failure of the approval the Belgian Presidency of the Council released a statement which concluded: “We now have to consider the state of play and will see if it’s possible to address the concerns put forward by member states, in consultation with the European Parliament.” What those concerns are – and whether they can be overcome – is fundamental to any future approval of CSDDD.

What is not in doubt, however, is the disappointment of key sustainability figures, who view the politicking and back-and-forth as little more than a scandalous attempt at obfuscation.

As Uku Lilleväli, Sustainable Finance Policy Officer at WWF European Policy Office, noted: “It’s scandalous that, in the 21st century, certain European lawmakers wish to permit companies to ignore human rights and environmental integrity, all under the guise of short-term profits. Let’s be clear: the law wouldn’t burden companies with unnecessary red tape; instead, it would secure a level playing field and help firms navigate necessary transitions in an informed and responsible manner.”

However, regardless of the future direction of travel of CSDDD, it remains clear that the push for increased regulation and legislation isn’t going anywhere. It is time for companies to get their houses in order.

In order to prepare, they must put together a holistic view of their supply chains along with a product-centric view of the lifecycle of their products.

Under a product-centric view, companies start upstream and follow each product all the way downstream so they can get a holistic view of their supply chain. This will better set them up for success when they try to align their efforts with regulations when the time comes.

As for when that will be – who knows? But it will be sooner rather than later, and forward-thinking organizations should start to get a handle on their supply chains now. As initiatives like CSDDD – or whatever guise it may take in the future – become more common, the thresholds for compliance will go down and more and more businesses will be required to pay attention.

One way or another – and with an eye firmly on the longer-term future – initiatives like CSRD and CSDDD are going to have an impact on your business.

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