Due diligence in the supply chain and... controversial changes
In February this year, the European Commission unveiled a draft Corporate Sustainability Due Diligence Directive (also known as the CSDD - Corporate Sustainability Due Diligence Directive).
CSDDD - what is it about?
The role of the directive is to establish a concrete legal framework that will impose due diligence obligations on companies to protect human rights and the environment in the supply chain. To date, the guidelines contained in UN and OECD documents have been voluntary and thus, unfortunately, ineffective. The new directive will force businesses to identify the negative impact of their business activities and those of their subordinates on human rights and the environment. In addition, they will be obliged to be responsible also for the activities of their business partners. This will result in the fact that from now on smaller business entities that provide services to large companies, which are subject to non-financial reporting, will also be forced to take an interest in this topic. In addition to this, large market players will have to implement and then review and update due diligence policies on an ongoing basis. Companies will be required to prevent the potential adverse effects of their activities and to develop and then implement appropriate procedures and systems that will allow those affected by them to file, and the company to investigate, complaints. It will also become necessary for some businesses to develop a decarbonization strategy.
In short, the main obligations imposed on companies by this directive are:
ensure due diligence in the area of respect for human rights and care for the environment
creating preventive action plans and codes of conduct agreed with business partners to reduce the organization's negative impact
incorporate due diligence requirements into supply chain contracts,
supporting SMEs in complying with these requirements
inclusion of ESG goals in remuneration criteria for management positions.
Who will the new regulation cover?
The supply chain due diligence reporting obligation will cover both EU and non-EU companies. In general, regulated entities can be divided into two groups:
companies that had more than 500 employees in the last fiscal year and had net revenues exceeding €150 million,
companies that did not meet the thresholds indicated above, but had an average of more than 250 employees and in the last fiscal year, had net revenues of more than €40 million, provided that at least 50% of these net sales revenues were generated in one or more of the sectors indicated in the draft, i.e.: textile production, agriculture, forestry, fishing and mineral extraction. SMEs, admittedly, will not be directly affected by the proposed regulations, but as I mentioned earlier, they will also be indirectly affected by the new rules.
Controversial proposals for change
But are the assumptions of the original draft sure to stand up? We don't know. For over the past few days there has been a proposal to make some significant and... controversial changes to the document. Why the controversy? The latest draft of the directive significantly reduces the scope of impact of the provisions on compliance with the principles of sustainable development. According to the new version, the due diligence directive would first cover very large companies with more than 1,000 (rather than 500) employees and a net turnover of €300 million (rather than €250 million). After three years, the directive would also apply to non-European companies with a net turnover of €300 million in the EU. As a result of these changes, the directive would not cover service companies or exports of weapons or surveillance equipment. Moreover, in the new version, the EU Council wants to limit the financial liability of companies for human rights violations and non-compliance with environmental regulations, and this was, after all, one of the key objectives of the previous version of the CSDD. Secondly, the new draft of the CSDD also fails to adequately address the climate-environmental challenges discussed in some detail at the climate summits: COP27 and COP15, which focused on discussions of biodiversity, combating species extinction and preventing environmental degradation. At COP15 in Montreal, it was pointed out that the agreements from the previous summit had not been fulfilled. The question is what to do next since the responsibility of companies in this regard has been strongly conservative all along. The new proposal also envisages a relaxation of liability requirements for the financial sector, which would be exempted from the regulatory obligation, and would only be able to carry it out voluntarily - at the discretion of member states. In this regard, certain financial activities such as investment activities have been excluded from the regulatory obligation. In addition, obligations for company directors, i.e. making directors' remuneration conditional on having climate transformation plans for large companies, were removed from the earlier text. Another important issue is the replacement of the term "supply chain" with "chain of activities," as the introduction of the new term leaves it at odds with other regulations where the former term has been adopted.
As you can see, work and discussions on this directive are still ongoing, so what its final form will be remains to be seen. However, all indications are that the EU Council is going in the direction of easing regulations rather than tightening them, which will result in us being at the same point all the time with no chance of positive changes for society and the environment.