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Insights Preparing for the CSDDD

Preparing for the CSDDD

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​​​​​​​​​​​Last updated on July 16, 2024 | Reading time approximately 4 minutes


Following an eventful legislative process, the Corporate Sustainability Due Diligence Directive (CSDDD) was published in the EU Official Journal on Friday, July 5, 2024.

The directive must now be transposed into national law within a two-year period. The aim of the CSDDD, as well as the currently applicable Supply Chain Due Diligence Act (SCDDA), is to implement a risk-based due diligence system in companies that prevents, remedies, or at least mitigates human rights and environmental risks or violations in the supply chain.
 
How can German companies prepare for the new regulations, and what differences are emerging compared to the German Supply Chain Act?​
 

 
 

Scope and Transition Periods

In addition to the number of employees, the CSDDD also considers a company's annual turnover and legal form (referenced in the Directive). A company falls within the scope only if all three criteria are met. Non-EU companies are included if their legal form is comparable and if, regardless of their number of employees, they exceed an EU-wide annual turnover of 450 million EUR. Newly included are certain franchise and licensing systems.

 

While these additional criteria may result in some German companies no longer falling within the scope, some new companies may become subject to due diligence obligations through licensing and franchise connections.

 

The CSDDD provides generous transition periods and takes full effect in three stages. When a company falls within the scope depends on its size:


  • after three years for companies with at least 5,000 employees and an annual turnover of at least 1.5 billion EUR (expected in 2027);
  • after four years for companies with at least 3,000 employees and an annual turnover of at least 900 million EUR (expected in 2028);
  • after five years for companies with at least 1,000 employees and an annual turnover of 450 million EUR (expected in 2029).
Ultimately, the design of the scope and transition periods is at the discretion of the national legislator. The CSDDD only prescribes a minimum standard in this regard.
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Building upon German Experience

It is already worthwhile to keep an eye on the CSDDD regulations and adjust existing processes accordingly to establish a unified concept from the outset. The due diligence obligations under the SCDDA provide a good foundation. German companies can leverage their accumulated experience as an advantage to build upon.

Strengthening Prioritization​

Prioritization is already a component of the SCDDA, and this aspect is further reinforced by the CSDDD. The scope of the CSDDD encompasses the entire upstream supply chain and certain parts of the downstream activity chain, emphasizing the necessity for companies to address the most severe and likely risks related to their products or services. Since the most severe potential human rights and environment-related violations often lie deeper in the supply chain, the EU directive suggests a more demanding yet prioritized and less bureaucratic approach. The forthcoming EU regulation therefore offers German companies the opportunity to establish leaner but more effective due diligence processes in their supply chains.
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Group Level Fulfillment of Due Diligence Obligations​​

To enhance effectiveness, the CSDDD allows for the consolidated fulfillment of obligations at the parent company level, which generally has more resources than its subsidiaries. The directive explicitly provides for the use of support from multi-stakeholder initiatives and shared certifications to pool resources and expertise. Additionally, non-operational holding companies can delegate due diligence obligations to a subsidiary upon request.

These practical regulations enable companies to decide who is best equipped to fulfill the directive's requirements. Moreover, they allow for better utilization of synergies between different companies. However, these facilitations are tied to the principle of effectiveness. Any delegation of obligations must ensure that effective compliance is still maintained. Liability for the fulfillment of due diligence obligations remains intact. The CSDDD explicitly rejects a "safe harbor" approach, meaning there is no limited liability by transferring responsibility to third parties.


Financial Sector

The responsibility of the financial sector remains largely excluded under the CSDDD. Only the upstream area, such as the procurement of work equipment, is covered.​

Civil Liability

In case of violations of due diligence obligations that lead to breaches of the rights protected by the CSDDD, companies may face civil lawsuits for damages in addition to regulatory sanctions. Liability, however, is only foreseen in cases of intent and negligence. Since a violation of duty is a prerequisite for liability, the prioritization principle mentioned above incidentally applies here as well. Thus, when interpreting and applying the liability norm, it will be crucial to determine whether a company has taken "appropriate measures" as defined by the directive to effectively address the most severe and probable risks, considering the risk factors relevant to each individual case. It is advisable to review the effectiveness of internal due diligence processes and ensure that a serious effort is evident.

Climate Transition plans and Environmental Risks​​

The CSDDD expands the catalog of environmental risks to be considered in the supply chain, including the protection of biodiversity and endangered species. A new obligation is the creation and implementation of climate transition plans aligned with the Paris 1.5°C goal. However, only the creation of the plan, not its implementation, will be monitored by national authorities.
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Strengthening Stakeholder Involvement​

The CSDDD dedicates an entire article to the involvement of stakeholders, strengthening their rights and setting guidelines for effective communication. Companies are required to take protective measures for vulnerable stakeholders when necessary.

Adequate support for SMEs​​

The CSDDD requires companies with due diligence obligations to provide targeted and appropriate support to an SME business partner, including access to capacity building, training, or modernization of management systems. Contractual assurances from SMEs must be fair, reasonable, and non-discriminatory and should be supported by suitable measures when necessary. Large companies must primarily obtain information directly from business partners where the risk is likely to occur. This protective measure could prevent overwhelming and unfocused questionnaires. The provision of model contract clauses is also envisaged, and audit pooling is permissible to minimize the burden on suppliers and strengthen effective collaboration in the supply chain.

Downstream Supply Chain

Due diligence obligations regarding the downstream supply chain relate to distribution, transportation, and storage activities, provided the business partners perform these activities for or on behalf of the company. The downstream use of products and disposal are not covered.

Reporting​

The CSDDD stipulates that companies subject to the sustainability reporting requirements under the Corporate Sustainability Reporting Directive (CSRD) are not required to submit a separate report on the implementation of due diligence obligations under the CSDDD. This avoids double reporting obligations. The directive mandates that the Commission adopt delegated acts regarding the content and criteria for describing due diligence obligations. In drafting these delegated acts, the Commission will duly consider and adapt the sustainability reporting standards to create as coherent guidelines as possible.
Even for companies currently or in the future only subject to the CSRD, it can be valuable to voluntarily implement the core elements of the CSDDD. For sustainability reporting, companies must analyze and report on risks, creating an incentive to address these risks with appropriate measures.

Conclusion and outlook​

Due to the SCDDA, German companies are already well-positioned to meet EU-wide due diligence obligations. They can leverage their accumulated experiences as an opportunity to further optimize their processes in light of the CSDDD. The CSDDD particularly encourages a stronger emphasis on the principles of prioritization and effectiveness.
 
However, the European directive also introduces new elements that companies should address, such as additional environmental and climate-related obligations. Since these topics are also significant for sustainability reporting, it is advisable to establish a risk management system and integrate responsible business practices into all relevant company processes.

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