EU Directive on Corporate Sustainability Due Diligence : A Practical Guide for Businesses [Updated]

The EU Directive on Corporate Sustainability Due Diligence (CSDDD) is a regulation that is commonly referred to as the "EU Directive on Due Diligence", "CSDDD" or "CS3D". It requires certain businesses to identify, prevent, mitigate, and account for the potential adverse human rights and environmental impacts of their operations and value chains.

The CSDDD is expected to be finalized in 2025 and will apply to businesses that have significant operations or sales in the EU, as well as businesses that sell products or services in the EU. It is important to note that the CSDDD is not the same as the Corporate Sustainability Reporting Directive (CSRD), which is a broader reporting framework that encourages companies to report on their sustainability activities. The CSDDD focuses specifically on corporate due diligence on human rights and the environment, including prevention and remedy, and will feed into CSRD reporting.

If you want to find out if your company is affected by the CSDDD and how to comply with it, keep reading. This is important information for both European companies and their suppliers.

Brief Overview

The CSDDD, just like other recent human rights and environmental due diligence laws such as the LkSG (German Supply Chain Due Diligence Act), requires businesses to follow a due diligence process that aligns with the OECD Guidelines and UN Guiding Principles. These laws aim to address the potential impacts of your business and supply chain partners' operations and sourcing on workers and other people who might be affected. However, they do not require you to identify and remedy the risks of these operations to your business.

The scope of these laws and the companies directly impacted, as well as the supply chain partners included, vary from law to law. It's important to note that EU Directives must be implemented by national law to be effective, so please check with your legal counsel about your legal requirements. This summary is intended to provide a general overview for informational purposes.

Does CSDDD affect your business?

The EU Directive on Due Diligence will affect fewer companies than originally planned. However, many large companies based in the EU or with significant EU operations will be covered. The regulation will apply to both European and foreign companies with 1,000 employees and a turnover of €450 million during the five-year phase-in period. Companies with 5,000 employees and €1,500 million turnover will be impacted first and should expect changes within the next three years. The high-risk sector approach has been removed temporarily, but it may be considered in the future as part of the CSDDD.

If your business does not sell or operate in the EU, you may not be directly affected by the CSDDD. However, you may still be impacted due to your association with value chain partners. If you are a contractor, subcontractor, manufacturer, service provider, distributor, or retailer for a European business (or other business that falls under the CSDDD), you may notice changes in your contractual relationships that enable regulated businesses to comply with their obligations.

These new regulations make each business responsible for human rights and environmental issues in its supply partners, distributors, and customers. Therefore, any company that conducts business with a company that has a significant European presence, or operations could be affected indirectly. By being prepared, the impact of these new laws can be minimized, as explained below.

After the EU Directive is finalized, each EU member state will have to pass national legislation to implement it, which may vary slightly from the original directive. The national legislation is expected to be passed by 2025, and each company will have to consider which national laws apply to its operations and what specific requirements they entail. You can keep track of the progress of the EU Directive on Due Diligence.

Are you ready for the upcoming CSDDD? Don't let the changes catch you off guard. Allow us to help you kickstart to ensure a seamless transition.

Practical Guide for CSDDD Compliance

Requirements:

To work with EU buyers, it's important to be prepared for their requirements, which may vary slightly across member states implementing their version of the CSDDD.

Direct Requirements: HRDD Process, Internal Governance + Supply Chain Grievance

Businesses that are directly regulated will be obligated to implement a human rights due diligence process that is similar to the LkSG and other HREDD regulations. This process consists of six steps: design, assess, identify, prevent, remediate, and report.

The goal is to identify and manage human rights and environmental risks, establish internal governance standards, and implement a human rights policy with a grievance mechanism for impacted individuals to report issues or complaints. Labor Solutions has covered these in detail in eBook "Strategies for Effective Human Rights Due Diligence in Your Supply Chain".

Indirect Requirements: Support Identification, Prevention, Remedy and Reporting

Indirectly regulated businesses must collaborate with their directly regulated supply chain partners to comply with new regulations. This involves updating contractual obligations and codes of conduct, providing training and support, fulfilling reporting requirements, and implementing other mechanisms that satisfy the law.

Obligations:

Scope of Risks Responsible

New in the CSDDD (and different from some other HRDD) is the scope of the risks and operations that are covered. For example, the LkSG requires that only the risks presented by direct suppliers (and risks posed by indirect suppliers if known) must be addressed, prevented, and remedied. On the other hand, the CSDDD proposes that partners both upstream and downstream be included in the scope of responsibility, which is likely to encompass indirect suppliers.

Scope of Actions Required

These regulations pertain to business practices rather than reporting requirements or compliance laws. As such, they call for a distinct approach from what may be accustomed to. To comply with these regulations, it's necessary to continually monitor and proactively engage with customers and suppliers to ensure a focus on preventing and minimizing the negative impact of human rights and environmental issues on people.

Labor Solutions assists suppliers and regulated businesses in collecting quality data for better business and purchasing decisions. Labor Solutions offers tools like advisory and consulting work, as well as the HRDD Starter Kit that provides scalable solutions to meet CSDDD and HRDD requirements.

The most important thing is to start, and you don’t have to do it all alone.

First Steps to Compliance:

HRDD Process

Regulated businesses must perform due diligence, including risk assessment, identification, prevention, remediation, and reporting. More details about this process can be found here.

The scope of risks and operations may differ, but it is always advisable to start understanding the general risks associated with the countries and industries you source from. This will help you identify specific risks in your value chain through surveys, grievance tools, audits, and assessments.

When working with your suppliers, customers, and other stakeholders, start engaging with your supply chain partners. The suppliers should be responsible for conducting identification efforts, operating their grievance management system, implementing prevention methods, and remediating complaints. The objective is not to micromanage but to build trust and support mechanisms for suppliers when needed.

Grievance or Complaints Process

Businesses that are directly regulated must establish a complaints process or grievance mechanism that is accessible by workers and other individuals who may be affected by any company within your value chain. There are several service providers available that offer hotlines and grievance tools. However, it is essential to ensure that not only is there a communication channel, but it is also effective in collecting complaints and providing effective solutions.

Our eLearning library offers a comprehensive range of courses to help you understand the requirements better. For example, our practitioner training on Access to Remedy provides detailed information on the elements of effective remedies and how to choose an appropriate service provider.

We also recommend that you educate your suppliers about the new requirements. Our online modules on human rights due diligence can be customized to meet your company's specific needs and can assist you in communicating the due diligence process to all your direct and indirect suppliers effectively, across various risk-based categories.

Suppliers and indirectly regulated businesses can prepare for the new due diligence requirements of their CSDDD buyers by following a few simple steps. We have helpful blog posts on this topic.

1. Contact our advisory team if you need assistance in creating a risk management system.

2. Start with conducting a Worker Survey to help identify the potential risks.

3. Implement WOVO's Connect features to ensure that you have an effective grievance mechanism and case management system in place to identify and prevent issues.

4. Deploy our eLearning courses on rights and responsibilities or responsible recruitment to ensure that workers and managers know their responsibilities and rights, thus helping mitigate the risks.

5. Collaborate with our advisory team to design a remediation plan.

6. Use your WOVO dashboard to report and track trends.

Labor Solutions' supplier ownership, empowerment, and improvement approach is not only scalable but also allows companies to tackle the problem at the source and collect unparalleled data sets. Our solutions go beyond tick-box solutions and are designed to help your business meet the intent of labor laws while creating customized, sustainable solutions built around respect and trust between workers, buyers, suppliers, and brands.

For more information, here are some of our previous posts on HRDD and how to work with your suppliers to meet the new requirements.