by Michel Klompmaker
On 1 June 2023, The European Parliament reached a provisional agreement on the Corporate Sustainability Due Diligence Directive (CSDDD for short). This directive requires all large organisations in Europe to identify and, where necessary, prevent, eliminate or reduce the negative impact of their activities on human rights and the environment in their value chains. Thus, the CSDDD is a duty of due diligence that affects entire value chains. We talked about this directive with Johan Löfquist, Head of Sustainability Data at Worldfavor.
The purpose of the CSDDD is to safeguard human rights, address environmental concerns in value chains, minimise environmental damage and ultimately combat climate change. Why are large companies being held accountable for these matters?
Johan Löfquist: “The goal of the CSDDD is to hold more companies accountable for their wrongdoing and prevent negative impacts from occurring in the first place. Think of it like an annual health checkup to make sure your company’s actions aren’t causing any harm. And if they do – create an action plan to fix it.
You might say, it should be up to companies themselves to start this process. The problem, however, is that most companies operate in complex setups with far-reaching value chains. Even for those that genuinely want to operate ethically, too many struggle to access trustworthy information on what their suppliers and sub-suppliers are up to. To enable sustainable decision making, you need data to become more available at a systematic level. The CSDDD will help with this, also in part because it will standardise the data that companies put out.
Additionally, many large and small companies are already taking measures in line with or close to CSDDD on a voluntary basis. So, holding all companies accountable is an excellent way of levelling the playing field and get a fair competition within union.
As to why large companies are within the scope of the legislation and smaller ones are not, the EU generally tends to leave smaller companies out of these types of directives to lessen the administrative burden on those with less resources.”
In the Netherlands, ‘The Responsible and Sustainable International Business Act’ already led to fierce discussions and debates. To what extent will this Dutch law be overruled by the European CSDDD directive, or will/can this law be amended?
Johan Löfquist: “When the CSDDD is officially adopted, each EU member state will have two years to fully integrate it to the national law. As is all other cases, EU law has primacy over national legislation. To what extent any Dutch legislation will be overruled is hard to say as the Dutch law hasn’t been finalised.
That being said, the Netherlands went ahead with its own legislation with the intention to speed up the process of implementing due diligence legislation for businesses, not with the intent to implement a very different type of legislation from the EU’s. Both are based on international standards like the UN’s Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises, and the OECD Due Diligence Guidance for Responsible Business Conduct. There should be a high degree of overlap between the two, so any Dutch legislation that does come about shouldn’t have to be altered too much.”
What are currently the biggest risks Dutch companies face with regards to the CSDDD?
Johan Löfquist: “Commenting on the risk for Dutch companies specifically is somewhat outside of my and Worldfavor’s specific scope of expertise. What I can say, and what we do know from our experience of helping companies access their sustainability data, is that companies can rarely accurately assess what type of human rights, environmental or other risk are in their supply chain just looking at the surface of their operations. Often, it will require much more in-depth inquiries into your suppliers, and this process can be arduous. Simply put, the most common risk nearly all companies face, Dutch ones included, is underestimating what it will take and starting out late. They may and find that either there is a lot of risk they’ll have to mitigate or that the process will take a lot more time and energy than it seems at the surface. You really want to make sure you’ll be ready when the legislation comes into effect to avoid non-compliance.”
Non-compliance with the CSDDD is a risk (for organisations). What consequences can organisations expect for non-compliance and what penalties can be imposed?
Johan Löfquist: “Companies that fail to comply risk being faced with a compliance order or even large financial penalties based on the company’s turnover. The current proposal affirms that companies will be liable for damages that could have been prevented if it was identified, mitigated, or brought to an end through appropriate measures. This is largely to ensure effective compensation of victims of adverse impacts – and each member state is required to lay down rules governing the civil liability of companies for damages arising due to its failure to comply with the due diligence process.”
The European Commission estimates that about 13,000 EU companies and 4,000 third-country companies are impacted by the CSDDD – Can you explained the so-called “introduction clause?”
Johan Löfquist: “How and when the CSDDD will apply to you depends on things like your company’s size, business activities, and where you are located. Keep in mind, these deadlines and requirements may still change until the CSDDD becomes fully ratified. It’s quite a list currently, so please bear with me.
- Group one includes EU companies with over 500 employees and over 150 million EUR in net turnover who will have to identify, end, prevent, mitigate, and account for negative human rights and environmental impacts of their actions, including in their value chains both inside and outside Europe. They are expected to start complying by 2026.
- Group two are EU companies with over 40 million EUR in net turnover with at least 50% generated in a high-impact sector, which included textile manufacturing, agriculture and mineral resource extraction. These will have to identify, end, prevent, mitigate, and account for negative human rights and environmental impacts of their actions, including in their value chains both inside and outside Europe. The expected deadline for compliance is expected to be 2028.
- Group three consists of non-EU companies with over 500 employees and over 150 million EUR in net turnover in the EU. These companies have to create a plan to make sure that their business strategy is in line with the Paris Agreement of limiting global warming to 1.5 degrees Celsius and are expected to start complying in 2029.
- Group four companies are similar to group two. They are non-EU companies with over 40 million EUR in net turnover in the EU and operate in one or more high-impact sectors. They have to implement the same measures as group two but have 2030 as their starting date.”
How will the CSDDD impact Europe in the long run?
Johan Löfquist: “It’s hard to say how far the impact will reach. However, I have been working with companies to help them measure and act on their sustainability data since way before any EU-wide legislation was adopted, so I can relate this development to how the landscape has changed and continues to respond to these kinds of transformative pieces of legislation.
When we think of companies and sustainable action, a common frame is that many of them don’t want to act. Often, the reality is more that many companies do want to act, but don’t have the data that they need to be able to make informed decisions. How can a furniture store sell sustainable produce if the market of timber suppliers is entirely non-transparent about their sourcing?
I used the word transformative because laws like the CSDDD are really fundamentally changing that situation. Data availability will become the norm, which will help open up a whole range of decision making. Consumers who want to make sustainable decisions will be able to really check and see what it is they’re buying, and green investors will be less likely to accidentally invest in brown companies. The CSDDD takes this a step further by not only boosting transparency within supply chains, but also holding companies responsible for the damage that supply chain causes. The era of companies turning a blind eye is coming to an end. For companies seeking to do good, the CSDDD will help make that possible. For companies who are causing a negative impact, they have some work to do. Luckily, the industry of sustainability experts and tools that help either type of company make a change is really maturing. Anyone can get started today if they wish it.
If it pans out as planned, it will most certainly put Europe as a leader in responsible business conduct, and not only the climate transformation. EU companies’ way of working could become an international benchmark that would result in spill over effects in countries with less regulatory compliance when it comes to human and labor rights and environmental compliance”
Thank you for this interview.
Johan Löfquist: “No problem, thanks for talking to me. And for anyone interested in learning more about the CSDDD or other upcoming EU or national sustainability regulation, we have a ton of relevant educational information on our website at Worldfavor.com.“
