Author – Anchal Singh

The Corporate Sustainability Due Diligence Directive (CSDDD) marks a transformative change in the regulatory framework for businesses operating within the European Union (EU). As a crucial element of the EU’s broader agenda to encourage sustainable and ethically responsible business practices, the CSDDD imposes rigorous obligations on companies to thoroughly evaluate and manage the environmental and social impacts of their supply chains. While this directive aims to enhance corporate accountability, it also introduces several significant challenges for companies, particularly in navigating the complexities of existing and new regulatory requirements. In the following discussion, we will dive into the challenges that the companies face in effectively managing their supply chains in compliance with the CSDDD, and its interaction with other regulations.

1. Complex Compliance Landscape

The CSDDD does not exist in isolation; it is part of a broader framework of EU regulations aimed at promoting sustainability and human rights. This framework includes the Corporate Sustainability Reporting Directive (CSRD), the EU Deforestation Regulation, and the EU Conflict Minerals Regulation, among others. Companies must navigate this intricate regulatory environment, ensuring compliance with multiple regulations that may have overlapped or conflicted. The complexity of this landscape can be daunting, particularly for companies with global supply chains that span multiple jurisdictions.

2. Increased Due Diligence Requirements

One of the most significant challenges posed by the CSDDD is the increased due diligence requirements it mandates. Companies are required to conduct comprehensive assessments of human rights and environmental impacts throughout their supply chains, including both direct and indirect suppliers. This process is resource-intensive and complex, particularly for companies with extensive and global supply chains. The need to assess a broad range of suppliers adds layers of complexity and necessitates robust systems for monitoring and reporting.

3. Higher Thresholds for Coverage

While the CSDDD was initially intended to cover a wide range of companies, the final version of the directive sets higher thresholds for applicability. Specifically, the directive applies to companies with more than 1,000 employees and a turnover exceeding €450 million. While this means that many smaller companies may not be directly covered, they are not entirely off the hook. Larger companies are likely to impose due diligence requirements on their smaller partners, creating indirect pressure for compliance.

4. Potential for Fragmentation

The implementation of the CSDDD across EU member states is another area of concern. Different countries may adopt the directive with varying degrees of stringency, leading to potential fragmentation in compliance requirements. For companies operating across multiple jurisdictions, this could create significant challenges in standardizing their compliance efforts. The risk of differing national interpretations and enforcement practices adds another layer of complexity to an already challenging regulatory environment.

5. Impact on SMEs

Small and medium-sized enterprises (SMEs) may not be directly covered by the CSDDD, but they are far from unaffected. As larger companies strive to comply with the directive, they will likely push their due diligence requirements down the supply chain. This means that SMEs will face indirect pressure to enhance their own due diligence practices, potentially leading to increased operational costs and the need for additional resources. The burden on SMEs could be substantial, particularly for those that lack the resources to implement robust compliance systems.

6. Liability and Enforcement Risks

The CSDDD introduces significant liability for companies regarding their supply chain practices. Companies must not only demonstrate due diligence but also take proactive measures to prevent and mitigate adverse impacts. Failure to do so could result in legal repercussions, including fines and other penalties. The directive places a strong emphasis on accountability, making it essential for companies to invest in compliance and reporting systems that can withstand scrutiny.

7. Resource Allocation and Expertise

Implementing the necessary due diligence measures under the CSDDD requires significant resources, both in terms of financial investment and expertise. Companies may need to allocate substantial funds towards training, technology, and systems to manage compliance effectively. For smaller firms, this can be particularly challenging, as they may lack the internal resources or expertise to meet the directive’s requirements. The need for specialized knowledge in human rights and environmental issues further complicates the situation.

Conclusion

The Corporate Sustainability Due Diligence Directive (CSDDD) is a critical step towards promoting responsible business practices within the EU. However, it also presents substantial challenges for companies, particularly in managing their supply chains. The interplay with other regulations adds to the complexity, requiring a strategic approach to compliance that balances legal obligations with operational capabilities. As companies prepare for these changes, they must invest in robust systems and processes to navigate the evolving regulatory landscape successfully. By doing so, they can not only ensure compliance but also contribute to the broader goals of sustainability and ethical business practices.

References:

1. https://www.erm.com/insights/corporate-sustainability-due-diligence-directive-csddd/
2. https://co2-iq.com/en/eu-supply-chain-law
3. https://commission.europa.eu/business-economy-euro/doing-business-eu/sustainability-due-diligence-responsible-business/corporate-sustainability-due-diligence_en