The Flanders-China Chamber of Commerce organized a webinar on “Understanding the Corporate Sustainability Due Diligence Directive and its Impact on Business Practices” on October 10, 2024.
Ms. Gwenn Sonck, Executive Director, Flanders-China Chamber of Commerce/EU-China Business Association, welcomed the participants to the webinar and introduced the speakers. The CSDDD is a key regulatory initiative from the European Commission, requiring companies to identify, prevent, and mitigate human rights violations and environmental risks throughout their supply chains. This directive applies to large companies across multiple sectors, demanding thorough risk assessments and due diligence processes, with compliance monitored by authorities. Our webinar will cover practical steps for meeting these requirements, the role of key stakeholders, and how the directive will shape corporate governance and sustainability strategies moving forward.
Mr. Tom Wallyn, Director of Sustainability at PwC, explained that the CSDDD (or CS3D) is part of a broader corporate sustainability framework as part of the European green deal, which has three topics: carbon emission reduction, circular economy and the way to fund that transformation. Companies can receive grants from regional European institutions to fund that transformation. These conceptual and content-related obligations go hand-in-hand with a reporting framework in the EU. There are three blocks in the corporate sustainability framework: the European Sustainability Reporting Standards (ESRS), the Corporate Sustainability Reporting Directive (CSRD, and the EU Taxonomy Regulation. The ESRS will specify the information to be disclosed under CSRD and how this should be reported. It specifies who needs to report, when it needs to be reported, and where. Like in financial reporting, there needs to be assurance from a statutory auditor. The EU Taxonomy Regulation establishes a classification system for sustainable economic activities. Companies need to report on the share of “green” turnover, “green” capital expenditure (CapEX) and “green” operating expenditure (OpEX).
Previously missing was the requirement to do something when something in the reporting was found to be not right. This has changed with the CS3D. On top of the disclosure requirement, the CS3D focusses on the prevention and mitigation of sustainability issues, primarily on two fronts: human rights and the environment.
Ms. Caroline Schmidt, Senior Manager Environment and Sustainability at PwC, explained what is to be understood by the CS3D. The aim of the CSDDD is to foster sustainable and responsible corporate behavior throughout global value chains. It was formally adopted by the EU Council on 24 May 2024. Member states must now transpose it into national legislation by 26 July 2026. The directive covers human rights and environmental impacts, requiring companies to identify, prevent, mitigate, and account for potential adverse impacts in their operations and value chains.
What is the purpose of the CSDDD?
• To protect against actual and potential adverse human and environmental impacts.
• To require larger enterprises to adopt a plan to ensure their business models align with the 1.5°C target of the Paris Agreement by 2100 and with the transition to a sustainable economy.
• To introduce an obligation for enterprises to carry out risk-based due diligence.
• To transform international standards on responsible business conduct into enforceable legal obligations.
• To provide for penalties and specific civil liability rules for those who breach their obligations and damage occurs.
Who is affected by the CSDDD? The regulation directly applies to very large companies established in the EU, based on the number of employees and worldwide turnover, as well as to third-country companies with significant operations in the EU, based only on their turnover. Companies with substantial royalty-based business models will also fall under the scope of the regulation. The effects will ripple through the value chain, as covered companies must address the impact of their subsidiaries and business partners. There is centralized compliance. The CSDDD allows parent companies to fulfill certain due diligence obligations on behalf of their subsidiaries, but they will still be subject to supervisory authority powers and civil liability under the directive. Parent companies should still be allowed to share resources and information within their group of companies to make due diligence more effective.
What are the CS3D key concepts and definitions? The directive lays down rules on obligations for companies regarding actual and potential human rights and environmental adverse impacts, with respect to their own operations, by their subsidiaries, and by their business partners in the chains of activities of those companies. The detailed topics covered by human and environmental rights are covered in Annex I of the CSDDD. Due diligence requirements include due diligence integration; adverse impacts identification and prioritization; prevention or ceasing of actual and potential adverse impacts; providing remediation for actual adverse impacts; stakeholders engagement and complaints procedure; monitoring; and communication of due diligence efforts. The second obligation following the due diligence requirements is to ensure that the company's business model and strategy is compatible with the Climate Transition Plan limiting global warming to 1.5°C in line with the Paris Agreement and the objective of achieving climate neutrality. This includes setting time-bound targets for 2030 and up to 2050; describing decarbonization levers; quantifying investment and funding; and identifying administrative, management and supervisory bodies.
Penalties & liabilities: The extent of civil liability will be established in national law, but the CSDDD sets minimum standards. Fines go up to 5% of a company's worldwide net turnover, but will be weighted taking into account several factors. Anyone will be entitled to submit substantiated concerns to the supervisory authorities, which can order an end to the infringements, adopt interim measures in the event of imminent risk, and mandate remediation actions.
Mr. Tom Wallyn concluded that the CSRD and CS3D is another obligation for companies doing business in the European Union, including non-EU entities. The reporting framework is really a call and obligation for action. The question is how will non-EU entities in particular react to that. The directive is not yet applicable so we will see how businesses deal with this new regulation.
A Q&A session concluded the webinar.
The recordings and the PPT of the webinar are available to FCCC members upon request.
