The EU Directive on Corporate Sustainability Due Diligence (CSDDD), commonly called the “EU Directive on Due Diligence” or “CSDDD”, is a regulation that requires 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 with significant operations or sales in the EU, as well as businesses that sell products or services in the EU. Read on to find out if this law affects you, what it does, and how to take the first steps to comply for both European companies and their suppliers!
Not to be confused with CSRD, or the Corporate Sustainability Reporting Directive, which is a reporting framework aimed at encouraging companies to report sustainability activities relevant to their company, as opposed to the CSDDD focus on corporate due diligence, prevention, remedy, and reporting.
Brief Overview
The CSDDD adopts a similar approach as other recent human rights (and environmental) due diligence laws like the LkSG (German Supply Chain Due Diligence Act), which follow the OECD Guidelines and UN Guiding Principles. These laws address the potential impacts of your business and supply chain partners’ operations and sourcing on workers andother people who might be affected, not identifying and remedying the risks of these operations to your business.
Does CSDDD affect your business?
The EU Directive on Due Diligence will impact more companies than any previous HREDD legislation. Both European and foreign companies with a significant sales or operational presence in Europe could fall under the regulation (“directly regulated businesses”). For example, companies with an average of 250 employees and net sales of 40 million euros that generate at least 50% of their sales in one or more of the three “high-risk” sectors (textiles, fisheries, forestry and agriculture, and mineral resources) based on current language in the CSDDD. Each EU member country will implement the final CSDDD through national legislation, which could change your obligations slightly, so please check with your legal advisor to verify that your company will fall within the direct scope of these regulations.
If your business does not sell or operate in the EU you will not directly fall under the CSDDD, but you may be impacted because of your 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. Because these new regulations make each business responsible for human rights and environmental issues in its supply partners (and their suppliers), distributors, and customers, any company that does business with a company with a significant European presence or operations could be impacted (“indirectly regulated businesses”). But preparation can make the impact of these new laws easier, as we will explain.
As with all EU legislation, this directive will not take immediate effect in the form passed or approved by the EU bodies. Rather, once the EU Directive is finalized, each EU member state will need to pass national legislation to enact it, which can vary slightly from the original directive. The national legislation is expected by 2025, and each company will need to consider which national laws are applicable to its operations and what the specific requirements are. Check the progress of the EU Directive on Due Diligence.
Practical Guide for CSDDD Compliance
Requirements and Obligations:
Directly regulated businesses will face requirements that are very similar to LkSG and other HREDD regulations, which have six parts: design, assess, identify, prevent, remediate, and report a variety of human rights and environmental risks. Internal governance standards are also required, like a human rights policy with a designated decision-maker and a grievance mechanism and complaints process for impacted people to contact the company with issues. We cover these in detail in our eBook which you can access here.
Indirectly regulated businesses will need to work with their directly regulated supply chain partners to adapt, including updating contractual obligations and codes of conduct, training, support for prevention and remedy, reporting requirements, and other mechanisms to satisfy the law. If you want to work with EU buyers, you should prepare for these requirements. As each EU member state adopts their own version of the CSDDD there may be details that change from the high-level summary provided below.
New in the CSDDD (and different from some other HRDD) is the scope of the risks and operations that are covered. For instance, under the LkSG just the risks presented by direct suppliers (and risks posed by indirect suppliers if known) must be addressed, prevented, and remedied. Under the CSDDD, partners both upstream and downstream are proposed to be included in the scope of responsibility, which is likely to encompass indirect suppliers.
These are business regulations rather than reporting obligations or compliance laws, so they require a different approach than you may be used to. Ongoing monitoring and proactive engagement with suppliers to ensure that there is always a focus on preventing and minimizing the negative impact of human rights and environmental issues on people is expected.
At Labor Solutions we work with both suppliers and directly regulated businesses to collect quality data that helps you make better business and purchasing decisions. Our tools collect data that can help companies fulfill many of these obligations through our advisory and consulting work, our Engage survey tool; our Connect communication, grievance and case management platform; and our Educate library of eLearning for workers, production supervisors and corporate managers. Our HRDD Starter Kit is designed with your multi-tier supplier networks in mind and provides scalable solutions that meet the new 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:
Directly regulated businesses must create or design a due diligence process that includes risk assessment, identification, prevention, remediation, and reporting, like those generally required for HRDD (more details here). While the scope of risks and operations may vary, it is never too early to begin understanding the general risks in the countries and industries you source from, and to identify specific risks in your value chain through surveys, grievance tools, audits, and assessments. Work with your suppliers and other stakeholders to begin engagement with supply chain partners—suppliers must be charged with conducting identification efforts, operating their own grievance management system, implementing prevention methods, and remediating complaints. The objective is not micromanagement but building trust and support mechanisms for suppliers when needed.
Directly regulated businesses also need to put in place a complaints process or grievance mechanism that can be accessed by workers and others potentially impacted by the operations of any company in your value chain. There are many service providers of hotlines and grievance tools, but you need to ensure that not only is there a channel for communication, but that it is effective, both for collecting grievances as well as providing effective remedy. Our eLearning library can help you understand what these requirements mean, e.g. our practitioner training on Access to Remedy provides details about the elements of effective remedy and how to select an appropriate service provider. We also recommend that you help your suppliers understand the new requirements, and our online modules on human rights due diligence (which can be customized for your company) and various risk-based categories can help you communicate the due diligence process at scale with all of your direct and indirect suppliers.
If you are a supplier or indirectly regulated, there are a few things you can do to anticipate the requirements that your CSDDD buyers will have and ensure that your business can meet the new due diligence requirements. We have several blog posts with helpful details.
Reach out to our advisory team to help you create a risk management system;
Start with a Worker Survey to help you identify your risks;
Implement WOVO’s Connect features to ensure you have an effective grievance mechanism and case management system to identify and prevent issues;
Implement our rights and responsibilities or responsible recruitment eLearning courses to ensure workers and managers know their rights and responsibilities to help prevent risks;
Work with our advisory team to design a remediation plan; and
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 are designed to help your business go beyond tick-box solutions and meet the intention of these laws; creating sustainable solutions customized to your business and 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.