EU Proposed Directive on Corporate Sustainability Due Diligence: Time to consider what this landmark ESG legislative proposal is all about

It is currently expected that by the end of 2023, the Corporate Sustainability Due Diligence Directive (CSDDD)* will be adopted, which will impose a duty on certain companies to conduct human rights and environmental due diligence on their operations, as well as those of their subsidiaries and supply chains. They will also need to address any identified adverse impacts included in a list of international conventions annexed to the CSDDD. Some potential adverse impacts on human rights and the environment which would need to be identified, prevented and/ or accounted for include forced labour, inadequate workplace health and safety, greenhouse gas emissions and waste disposal. The CSDDD will impose sanctions on non- compliant companies and civil liability on companies for violations of certain DD obligations.

In essence, the CSDDD requires companies to integrate far reaching due diligence processes into their corporate internal policies. Specifically, they are obligated to identify actual or potential adverse human rights and environmental impacts, prevent or mitigate potential impacts, end or minimise actual impacts, establish and maintain a complaints procedure, monitor the effectiveness of the DD policy and measures and publicly communicate what DD is being done. The CSDDD will ultimately have a big impact on the companies and on their business operations as it goes beyond simple reporting requirements to what they actually do in practice about ESG in their everyday business operations. It is worth noting that no new reporting requirements are being imposed under the CSDDD, as any relevant disclosures would need to be made through the EU’s Corporate Sustainability Reporting Directive.

This mandatory framework extends to companies registered or operating in the EU (i.e. including non- EU companies that generate EU turnover in excess of certain thresholds). There is currently some uncertainty over the exact scope of the CSDDD; in particular, whether this will extend to include entities active in the financial services sector, which is a controversial point and something on which the EU Commission, Council and Parliament have opposing views. The European Parliament has recently voted in favour of banks and insurers being obligated to carry out a DD on the companies that they provide cover for or a loan to. Similarly, it voted positively in favour of asset managers being subjected to a separate framework, to be proposed, which would set out how such entities would also be expected to engage with and conduct their DD on investee firms. The European Parliament is expected to release its final position on the CSDDD within the next month, after which the final text of the same will be further negotiated, with the aim of reaching an agreement between the EU Commission, Council and Parliament, at the end of 2023.

* The CSDDD was formally proposed by the European Commission on 23 February 2022, was negotiated on 1 December 2022 by the Council of the European Union and was further negotiated and amended on 25 April 2023 by the Parliament’s Committee on Legal Affairs.