The European Directive on Corporate Sustainability Due Diligence (CSDDD) becomes law and presents challenges for large companies, but also business opportunities for Italian PMI. These could replace non-compliant foreign suppliers or micro-enterprises in the supply chain of large clients, presenting an opportunity for certified Italian suppliers.
The Corporate Sustainability Due Diligence Directive, CSDDD, also known as the Supply Chain Act, was published in the Official Journal of the European Union on July 5, 2024. Member States will have two years to implement regulations and administrative procedures in compliance with the EU legal text.
Following the Corporate Sustainability Reporting Directive (CSRD), which requires large companies to report their sustainability activities in a detailed and transparent manner using the European Sustainability Reporting Standards (ESRS), the Corporate Sustainability Due Diligence Directive (CSDDD) further strengthens these rules. Specifically, the CSDDD outlines the responsibilities and transparency obligations of large companies not only for their direct activities but also for their subsidiaries and the entire value chain.
The political battle over the CSDDD
The text of the directive is the result of a long political battle that often saw European countries and trade associations divided, concerned about the impact of the regulations on industrial supply costs, the companies themselves, and potential new inflationary pressures. These concerns were alleviated in the final version of the directive through a gradual and proportionate application of the CSDDD. This was also made possible by the intervention of the Italian government, which negotiated a higher threshold for the size of companies that must comply with the directive.
Starting from July 26, 2027, companies with more than 5,000 employees and a turnover exceeding 1.5 billion euros will have to comply with the directive, with reference to the last financial year preceding that date. From July 26, 2028, the obligation will extend to companies with more than 3,000 employees and a turnover exceeding 900 million euros. Finally, from July 26, 2029, the directive will apply to all other companies falling within its scope, i.e., those with over 1,000 employees and a turnover exceeding 450 million euros.
Scope of application
This Directive applies to companies incorporated under the legislation of a Member State and meeting one of the following conditions:
Companies incorporated under the legislation of a Member State:
- Companies that:
- Have more than 1,000 employees on average.
- Have a net worldwide turnover exceeding 450,000,000 EUR in the last financial year for which annual accounts were or should have been approved.
2. Companies that are the ultimate parent company of a group meeting the above thresholds.
3. Companies that have entered into franchise or licensing agreements in the Union, where:
- Royalties from these agreements exceed 22,500,000 EUR in the last financial year for which annual accounts were or should have been approved.
- The company or its group has a net worldwide turnover exceeding 80,000,000 EUR in the last financial year for which annual accounts were or should have been approved.
Companies incorporated under the legislation of a third country:
- Companies with a net turnover exceeding 450,000,000 EUR in the Union in the financial year preceding the last financial year.
2. Companies that are the ultimate parent company of a group meeting the above threshold.
3. Companies that have entered into franchise or licensing agreements in the Union, where:
- Royalties from these agreements exceed 22,500,000 EUR in the Union in the financial year preceding the last financial year.
- The company or its group has a net turnover exceeding 80,000,000 EUR in the Union in the financial year preceding the last financial year.
How to prepare for the CSDDD
Companies will need to comply with the CSDDD through fundamental steps, requiring significant effort in change management and supply chain oversight. Firstly, they must determine if they fall within the scope of the directive based on the established size parameters. Next, they must compare their current due diligence policies with the requirements of the CSDDD.
It is crucial for companies to actively engage stakeholders, develop sustainability strategies, align their operations with the directive’s requirements, and document their sustainability efforts in official reports, ensuring transparency and regulatory compliance.
Additionally, companies must review and assign roles, competencies, and responsibilities within their governance and organization to ensure effective implementation of the directive. Finally, they should view the CSDDD as an opportunity to accelerate their sustainability strategy and fully realize the benefits of responsible and sustainable business management.
The obligations
The Corporate Sustainability Due Diligence Directive (CSDDD) sets forth obligations for companies to address negative impacts on human rights and the environment arising from their operations, the operations of their subsidiaries, and the activities of their business partners. Companies must adopt measures to prevent, mitigate, and minimize these impacts, integrating due diligence into their policies and management systems, and are responsible for violations of these obligations. The directive also requires companies to develop a transition plan for mitigating climate change, ensuring that their business model aligns with the transition to a sustainable economy and the goal of limiting global warming to 1.5°C, in line with the Paris Agreement. Companies must map and assess their operations, those of their subsidiaries, and those of their business partners to identify areas with the highest likelihood of severe negative impacts. They must then prevent and mitigate these impacts, establish a notification and complaint mechanism, and annually monitor the effectiveness of their due diligence policies. The directive also requires large companies to support PMI partners in ensuring compliance with obligations by providing training and proportionate financial support. Member States must ensure that companies adopt appropriate measures to identify and assess actual and potential negative impacts and that the directive does not reduce the level of protection for human, labor, and environmental rights established by national legislation or existing collective agreements.
Competencies and sanctions
Companies are liable for damages caused to people and the environment if they fail, intentionally or negligently, to fulfill their due diligence obligations regarding the prevention and mitigation of negative impacts. The CSDDD also imposes significant obligations on Member States, which must designate competent authorities for oversight. These could be the Labour Agency, the European Environment Agency, the European Union Agency for Fundamental Rights, or other international organizations experienced in risk management and prevention.
Furthermore, Member States must outline guidelines that include best practices for due diligence management, practical guidance on transition plans, sector-specific guidelines for stakeholder engagement, and information gathering. Non-compliance with due diligence obligations is sanctioned with fines of up to 5% of the company’s global net turnover. Additionally, companies that fail to fulfill their due diligence obligations will be held liable for damages caused and must fully compensate the victims.
Impact on large companies and PMI
The CSDDD makes companies in all sectors of the economy responsible for actual and potential negative impacts on the environment and human rights that may arise from their activities and business relationships with suppliers and subcontractors. Inevitably, large companies will need to limit risks and retain only those suppliers, including small enterprises, that can meet the disclosure requirements on relevant environmental and social sustainability issues and provide adequate certifications.
In this regard, the CSDDD could represent an opportunity for Italian PMI, as many multinationals might prefer them over low-cost (foreign or socially and environmentally dumping) suppliers with higher risk profiles. Recent investigations (with related restrictive measures) involving three companies in the fashion sector, such as Manufactures Dior, Giorgio Armani Operations, and Alviero Martini, highlight this trend.
Positive effects of the CSDDD on environment and human rights
The Corporate Sustainability Due Diligence Directive (CSDDD) represents a significant shift in corporate responsibility, imposing direct responsibility on parent companies for actions along their entire supply chain. This change is particularly relevant in the food and textile sectors, where human rights violations and environmental damage are frequent. Previously, parent companies could avoid responsibility for violations committed by their suppliers, contributing to harmful practices such as deforestation and labor exploitation. With the implementation of the CSDDD, companies will have to carefully monitor and assess not only their operations but also those of their suppliers, adopting effective measures to identify and mitigate negative impacts on human rights and the environment. This new responsibility will lead companies to exercise more stringent control and impose higher standards along the entire supply chain, encouraging compliance with regulations and reducing illegal practices. Consequently, the directive will promote greater environmental sustainability and protection of human rights, ensuring that operations comply with required standards and creating a significant positive impact on corporate policies and governance practices.
Image generated by AI
Graphic source: https://storyset.com/
