First introduced on the 23rd of April 2022, the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) was designed as a means of ensuring businesses address the adverse impacts of their operations within Europe and beyond. Just over two years later, on the 24th of April 2024, the law establishing the CSDDD was approved by the European Parliament. As such, it has cleared another hurdle on the path to becoming formally adopted by the EU.
The objectives of the Directive are, for example, to ensure better protection for human rights and the environment, improve living standards for those in less developed countries, and provide justice for those negatively impacted by the actions of businesses. In order to achieve these objectives, the Directive will require in-scope companies to, for example, implement Paris-aligned climate transition plans, and integrate human rights and environmental due diligence into policies and risk management systems at all relevant levels of operation.
In regards to its timescales, to EU (and parent) companies with a turnover in excess of 1,500 million Euros and an employee headcount of over 5,000 will fall within scope by 2027, those with a turnover in excess of 900 million Euros and an employee headcount of over 3,000 will fall within scope by 2028, and those with a turnover in excess of 450 million Euros and an employee headcount of over 1,000 will fall within scope by 2029. Companies with franchising or licensing agreements in the EU that have a worldwide turnover in excess of 80 million Euros, if at least 22.5 million Euros is generated by royalties, will also be in scope by 2029. Non-EU companies, parent companies, and companies with franchising or licensing agreements in the EU that reach the same turnover thresholds in the EU will also be covered.
It is also hoped that the CSDDD will benefit the companies that fall under its scope, as well as wider stakeholders. The EU has suggested that, for example, it will help attract investment by sustainability-oriented investors, and will thus provide better access to financing options for in-scope companies.
How does this effect the SRI space?
In theory, it should make our lives a little easier. Specifically, it should make the assessment of companies within scope of the Directive more straightforward from an ESG perspective. Given these companies will be required by law to have measures in place to limit their negative impacts, their risk profiles are likely to be lower, provided they are compliant. It should; however, be relatively easy to identify those that aren’t; EU member states can designate an authority to impose fines and compliance orders on non-compliant companies.
Furthermore, the CSDDD will likely improve transparency around what companies are doing to manage certain risks. This is, after all, another objective of the Directive. For us in the SRI space, this will make it simpler to assess and compare the actions taken by companies. While the CSDDD is a legal requirement, there is bound to be some companies that go above and beyond. The increased reporting on these matters will allow us to more easily identify those companies, and those which are just doing the minimum.
Overall, the final take from us here at Ethical Screening is that the CSDDD is perhaps a rather clever move by the EU, given it may attract foreign ESG investors and help channel capital towards companies that operate in the EU. We also feel that, like the EU Taxonomy, the CSDDD has the potential to be a game changer, or at least to shake things up a little - in a good way.
Sources and Related Articles:
News: European Parliament
Corporate sustainability due diligence - European Commission
EU Adopts Mandatory Rules on Corporate Sustainability Due Diligence That Will Apply to Many US Companies - Cooley
European Parliament Approves Corporate Sustainability Due Diligence Law - Forbes
After Delays, EU Approves Corporate Sustainability Due Diligence Law - Forbes