How to prepare for the EU’s new CSDDD regulations

Author: Greg Gowans
How to prepare for the EU's new CSDDD regulations

The EU's CSDDD may have been derailed, but shippers would be wise to avoid complacency.

Earlier this month, it emerged that the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) had been held back. On Wednesday, the plans then failed to secure a majority in the second vote. The legislation appeared to be on track for approval, only for a German Government coalition partner, the FDP, to throw spanner in the works. Due to the FDP failing to give its approval, Germany was forced to abstain, while Italy was also believed to have been on course to abstain too.

“Despite the Presidency’s efforts, the necessary support was not achieved. We must now examine the state of play and see whether it is possible to address the concerns of the member states in consultation with the European Parliament,” wrote the German Press Agency (dpa), quoting a statement from the Belgian EU Presidency that reacted to Wednesday’s vote.

According to Forbes contributor Jon McGowan, a US-based attorney who has published multiple scholarly works on ESG, there are indications that the “CSDDD is most likely dead until after the EU elections in June”. McGowan adds that if the legislation does eventually get approved, it “will be significantly watered down”.

Given these developments, it would be easy for some shippers to become complacent with their CSDDD preparations. 

However, the new rules have not been shelved, and even if they are watered down to some extent, Europe’s largest companies will still have their work cut out to avoid being stung. Taking the possible implementation of the legislation seriously should thus pay dividends.

What is the CSDDD?

The CSDDD rules were outlined in a European Commission document published in mid-December 2023. 

In the words of the European Commission, the goal of the legislation is as follows:

“The proposal aims to foster sustainable and responsible corporate behaviour throughout global value chains. Large companies will be required to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights, such as child labour and exploitation of workers, and on the environment, for example pollution and biodiversity loss.”

The European Commission argues that the CSDDD will provide businesses with legal certainty, a level playing field, and more sustainable competitiveness. In addition, it is argued that the CSDDD will mean better transparency for consumers and investors, as well as advancements in the green transition and the protection of human rights in Europe and beyond.

Who the rules apply to

The new diligence rules will apply to the following businesses: 

  • EU limited liability companies with more than 500 employees and a net global turnover of more than €150 million
  • EU limited liability companies that operate in specific high-impact sectors with more than 250 employees and a net global turnover of €40 million
  • non-EU companies meeting the above thresholds with turnover generated in the EU

Small and medium enterprises do not fall under the scope of the CSDDD.

What will companies have to do to comply?

The European Commission explains that not only will the CSDDD apply to a company’s own operations, but also its subsidiaries and their value chains. As a consequence, companies will need to integrate the following due diligence measures into their policies:

  • identify, assess and, where needed, prioritise actual or potential adverse human rights and environmental impacts
  • prevent or mitigate potential adverse impacts (bring to an end, minimise and remedy actual adverse impacts)
  • establish and maintain a notification mechanism and complaints procedure
  • monitor the effectiveness of the due diligence policy and measures
  • publicly communicate on due diligence

In addition, EU limited liability companies with more than 500 employees and a net global turnover of more than €150 million must “adopt transition plans and make best efforts to ensure that their business strategy is compatible with limiting global warming to 1.5 °C”.

What will the consequences of non-compliance be?

The European Commission states that companies that don’t comply will face sanctions from national administrative authorities. Moreover, victims will have the opportunity to seek legal redress for damages that they suffer as a result of the failure to conduct appropriate due diligence.

Like Germany’s supply chain due diligence law, these penalties can be severe.

“Each EU Member State will have to designate a supervisory authority which will have powers to impose penalties, including fines of up to at least 5% of the company’s worldwide turnover in the preceding financial year. In case of non-payment of fines, the name of the company and the nature of the infringement will be disclosed in a public statement,” writes Van Bael & Bellis, an independent law firm based in Brussels and London, in its CSDDD analysis.

According to KPMG, public sector bodies will also be able to use CSDDD compliance as part of the criteria when awarding contracts.

How can shippers prepare?

A number of major logistics and advisory companies have recently published their advice regarding preparations for the CSDDD. 

EY writes that shippers should map their subcontractors, and will also need to both develop and implement policy documents and procedures for control and follow-up.

Meanwhile, KPMG has referred to similar legislation that is already in place in some European countries, both EU and non-EU. Shippers familiar with this legislation can use this knowledge and experience to their advantage when preparing for the implementation of the CSDDD. 

Chief among these is Germany’s supply chain due diligence act, which has a lot of similarities with the EU’s CSDDD. “The legislation’s extra-territorial reach is similar to that of the CSDDD, capturing companies with a presence in Germany regardless of where they are headquartered,” says KPMG. 

Moreover, when it comes to the UK, KPMG notes the UK Modern Slavery Act and UK Corporate Governance Code. In the case of the former, companies with UK turnover of more than £36 million must “disclose the extent to which they exercise due diligence to prevent slavery and human trafficking in their business and supply chain”. As regards the latter, businesses are obliged to “explain how they have considered wider stakeholder needs, implicitly including environmental and social issues”. 

Finally, KPMG also refers to The EU Corporate Sustainability Reporting Directive (CSRD), which requires adoption and disclosure of climate transition plans. 

“Companies will not face duplicated requirements under the CSDDD but will be expected to put their plan into effect and update it every 12 months to assess progress towards targets. Similarly, the FCA already has climate transition planning requirements for some UK companies, with more are expected to be captured in due course,” says the well-known accountancy and advisory company.

Meanwhile, DHL argues that digitalisation will be key to providing the transparency required by the new rules:

“Be it CSRD or CSDDD: transparency in the supply chain is paramount for reporting in line with the law, and compliance with legal requirements can hardly be guaranteed without effective IT solutions. Which brings us directly to the topic of digitization. Admittedly, implementing digital technologies in operational processes to meet legal demands is time-consuming at first. On the other hand, systematic monitoring of the supply chain can do so much more than just verifying the sustainability of processes,” says DHL, via its Freight Connections portal.

DHL also warns that as the rules apply to the value chain as a whole, small and medium sized companies cannot be complacent about the CSDD either:

“As an integral part of the supply chain, small and medium-sized logistics companies will thus also be obliged to comply with the standards. The clients transfer their duty of care to the contractors. For this reason, companies of all sizes should create the resources in good time to provide relevant data on human rights and environmental risks – as some French and German companies are already required to do.”

When could the CSDDD enter into force?

The CSDDD proposals require formal approval by the European Parliament and European Council, something that has been held back by the developments referred to at the beginning of this article.

It is unclear precisely when this approval will come, though some observers believe that an agreement will be unlikely before the EU elections in June.

It is also important to remember that EU member states have two years to introduce the CSDDD, so its requirements likely won’t apply across the board until 2026 at the earliest. Although that may seem relatively far away, given the scope of the required preparations, those who wish to be safe rather than sorry would be wise to begin taking action now.