The European Union (EU) has reached provisional agreement on a new directive to establish a due diligence framework for corporate sustainability. The EU Corporate Sustainability Due Diligence Directive (CSDDD) requires companies operating in the EU to identify, prevent, end or mitigate negative impacts on human rights and the environment caused by their activities or in their value chains.
It applies to large companies operating in the EU with more than 500 employees, including those based outside the EU that are selling goods and services in the EU.
The directive would also establish a set of minimum due diligence requirements that companies must comply with. The Due Diligence process would include several steps, such as identifying and assessing sustainability risks, developing and implementing a plan to address those risks, monitoring the effectiveness of the plan, and reporting on the due diligence process and its outcomes.
Transition plan requirement
The proposed directive represents a significant step forward in the EU’s efforts to promote sustainable development and corporate responsibility and is likely to have a major impact on the way that companies operate in the EU.
The CSDDD represents a step forward in the battle against climate change, by requiring EU companies (including financial sector companies) to develop climate transition plans with clear reduction targets.
The plan should ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement.
The CSDDD does not state specific requirements for climate transition plans, close monitoring of further legal developments in each member state will be necessary.
Due diligence obligations could begin to apply as from 2025.