The hard-fought CSDDD battle: Implications for corporate accountability in Europe

Analysis note of the Global Observatory of Climate Action

Author: Tania Martha Thomas, Research Officer at the Observatory

Date: April 2024

Summary:

• The European context: The Green Taxonomy, CSRD, SFDR… and the CSDDD
• The CSDDD timeline so far
• A reduced scope, still with wide-reaching consequences
• Reactions from businesses

“Carbon neutrality” has become the driving principle of corporate climate action in the past few years – acting both as a target for emissions reduction, and as a narrative to frame their transition. The Race to Zero campaign launched at COP26 now lists over 10,200 businesses that have signed on^[1], and out of the 2,000 largest publicly traded companies, Net Zero Tracker lists 1,093 as having a net zero target as of April, 2024^[2]. While companies are pushing for more voluntary approaches to monitoring and evaluation of progress towards their climate commitments, these voluntary disclosures have made unsteady, mixed progress in the last years.^[3],[4]

At the same time, though subject to backlash, several countries and regions have been adopting standards or norms to oblige companies to report credible and comparable environmental, social and governance (ESG) data. The year 2023 saw a lot of discussion and back-and-forth on the development and adoption of these norms.

The European Context: The Green Taxonomy, CSRD, SFDR… and the CSDDD

As part of the European Green Deal, the EU proposed a transformation of corporate ESG reporting and disclosures through four key legislations: the green taxonomy, the Corporate Sustainability Reporting Directive (CSRD), the Sustainable Finance Disclosure Regulation (SFDR).The goals of this normative framework are to enhance corporate transparency and accountability, support sustainable investment from financial actors and better inform citizens and consumers of the best available practices.

• The Green Taxonomy, adopted in 2020, allows financial and non-financial companies to share a common definition of « environmentally sustainable” economic activities, thus allowing to identify corporate activities that are aligned with environmental targets.
• The CSRD entered into force in January 2023, revising the Non-Financial Reporting Directive which had been in place since 2014, to cover more companies and increase the degree of detailed in disclosures, in line with the taxonomy. It applies the mandatory European Sustainability Reporting Standards – which take into account “double materiality” principles. Member States of the EU have until July 2024 to transpose the CSRD into national law. Sector-specific reporting standards that were initially supposed to be adopted by mid-2024 are to be adopted by mid-2026.^[5]

• The SFDR, in force since 2021, applies to financial institutions (insurers, investment firms, pension institutions, fund managers) and financial advisors. It requires these institutions to integrate sustainability risks into their investment and compensation policies, and report on the negative impacts of investment decisions on sustainability factors.

Adding to this framework, and going beyond reporting towards action, is the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D). The largest mandatory law ever to be put into place, the CSDDD aims to incorporate considerations of human rights and environmental issues in the operations of companies. It will oblige companies covered in its scope to “identify, account for, end, prevent and mitigate negative impacts on human rights and the environment resulting from their own operations, their subsidiaries, and their value chains.”^[6] It obliges large companies to adopt and implement 1.5 °C-aligned transition plans detailing time-bound climate targets, key actions and explanations of the investments required to reach these targets. It also introduces elements like a grievance mechanism and stakeholder consultations as part of its implementation.

The CSDDD aims thus to engrave in law the due diligence duty of companies, within their own operations but also throughout their value chains – adding on also to the double-materiality principle of the CSRD. Companies and regulators now have the task of fitting CSDDD obligations into the existing framework, though this new law should centralise and simplify requirements under existing and upcoming legislations, including others like the battery regulation, the deforestation regulation, the conflict minerals regulation, and the forced labour ban.

The CSDDD timeline so far

The concept of “due diligence” itself was introduced by the UN Guiding Principles on Business and Human Rights (UNGP)[7] in 2011 and included in the 2011 OECD Guidelines for Multinational Enterprises,[8] within the scope of which it was extended to apply to other areas of responsible business conduct like the environment, climate change, and more.

The French devoir de vigilance law (2017)[9] is an example of the corporate due diligence requirements being set by law. This law requires French companies with more than 5,000 employees, or international companies with more than 10,000 employees in France to have a due diligence plan to address ESG risks in their own operations and those of their subsidiaries, subcontractors and suppliers, both in France and elsewhere. Such laws have since been adopted in other European countries as well, such as Germany and the Netherlands.

The development of the CSDDD, pre-dating the Green Deal, can be traced back to May 2018 European Parliament report on Sustainable Finance[10] and the Parliament’s 2021 resolution[11] which called for an overarching mandatory due diligence framework, and finally led to the Commission proposal for such a directive[12] introduced in February 2022. Following this were extensive negotiations between the Commission, the EU Council and the European Parliament, resulting in preliminary agreement in December 2023.

In early 2024 however, the law faced first faced opposition from Germany, driven by the business lobby, hit by recession and already subject to a national due diligence law, and thus concerned about the added burden on companies. This was then followed by Italy, and then finally 14 other Member States including France, Finland, Austria, and Hungary, all opposing the draft demanding changes in its provisions.[13]

After a month and a half of intense negotiations and postponed votes, a final deal was reached with approval from the Council on 15 March, which was voted through by the Parliament on 24 April, 2024. After a formal approval and signature by the Council and its publication in the Official Journal, the law will come into force.

A reduced scope, still with wide-reaching consequences

In order to reach final agreement on the Directive, several concessions had to be made, mainly to reduce its scope and prolong phase-in period. The current text also treads more lightly on enforcement, having done away with clauses related to the remuneration of directors and reducing legal liability in case of non-compliance.

Initially proposed to apply to all companies with 500 or more employees and 150 million euros in turnover in the preceding financial year, in its current version the CSDDD shall apply to EU and non-EU companies with 1,000 or more employees and turnover of €450 million – covering only a third of the initially proposed scope, to the criticism of civil society organisations.[14] The initial proposal from December 2023 was already considered “weakened” due to the exclusion of the financial sector from due diligence obligations.[15] According to the Richard Gardiner from the World Benchmarking Alliance, those companies that remain in the scope are the ones for whom the law was intended, and due diligence on their part could drive suppliers to a higher standard overall.

The requirements for companies under the CSDDD will be phased-in gradually over a longer period – applying from three years from its entry into force to companies having more than 5000 employees and €1500 million in turnover, from four years to companies having 3000 employees and €900 million in turnover, and five years to all others. While this delays the date from which the law will be effective, it allows companies more time to better prepare implementation, and carry out the required stakeholder engagement. The phasing-in by waves will also allow companies to learn from each other.

The CSDDD marks the first time that Paris-aligned transition plans are required by law. In the current corporate climate action landscape, detailed and credible transition planning was a significant hurdle to companies’ progress, as the Observatory noted in 2023[16]. Though transitions plans will naturally look different from one sector to another, a legal requirement could greatly help harmonise transition plans – a step towards achieving companies’ climate targets.

Reactions from businesses

The CSDDD, even after the concessions made in order to reach a deal, has received criticisms from the private sector, through interest groups like BusinessEurope, MEDEF, or the German federation of industries – citing the implications it might have on the competitivity of European businesses, and the administrative burden it would create.[17] The 2020 European Commission study published after the 2018 Parliament Report on Sustainable Finance showed how due diligence requirements could benefit companies – by making their supply chains more resilient and reducing potential operational and financial risks, the main reasons behind voluntary due diligence.[18]

Yet another supporting argument was that the CSDDD introduces a level playing field for companies, as seen in the statements from food corporations that called for the law to be finalised[19], and a note from the Italian Confederation of Craft Trades and Small- and Medium-Sized Enterprises stating that just like how the CSRD could help SMEs access finance, secure new business partners, consumers and customers, a law like the CSDDD that harmonises requirements at the European level will help them avoid unfair competitive advantages from companies that otherwise do not carry out due diligence.[20] SMEs are currently outside the scope of the law, but should benefit from the higher supplier standards, as well as support from the in-scope companies they engage with.

Several other business coalitions and associations from throughout the continent has also released statements in support of the directive earlier this year: Business for a Better Tomorrow, the German, Italian and European Sustainable Investment Forums,…

While international businesses have also raised opposition, calling the directive unfair, a 2023 study of the expected economic impacts of the CSDDD showed that the directive could have a positive impact on economic welfare in the Global South, notably through the stronger position of workers.[21]

As summed up by Amandine Van Den Berghe from Client Earth, speaking at the Climate Chance Europe 2024 Wallonia Summit, “The CSDDD can provide a level playing field in Europe by harmonizing the rules in all Member States, and can help achieve the goals of the Green Deal. It will help fill the gap in the regulatory framework, working in complementarity with the CSRD. The CSDDD is in a way how we turn data into action.”

This blog note was compiled and drafted with information from the sources cited and with inputs from Richard Gardiner, EU Public Policy Lead at the World Benchmarking Alliance.