Analysis of the draft Directive on Corporate Sustainability Due Diligence
More than 1% in fact
The CSDDD, like the LdV and the GSCDDA, applies to large companies. Small and medium enterprises (SMEs) are generally excluded from their direct scope. Considering that SMEs represent approximately 99% of all companies in the EU, their exclusion is a significant limitation of the CSDDD’s scope. However, the experience of the French LdV shows that nearly 80% of French SMEs – which are not directly subject to the law – are still asked to implement at least some measures of HREDD when they supply to larger companies covered by the LdV. It is therefore clear that the CSDDD too will indirectly apply to a significant number of SMEs that are part of larger companies’ value chains...
Adopting a climate change plan
According to Art. 15 (1) CSDDD, companies must adopt a plan to ensure that their business model and strategy 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. In this plan, companies must identify the extent to which climate change is a risk for or an impact of the companies’ operations. Additionally, companies will have to include specific emissions reduction objectives in their plans, if they identify climate change as a “principal” risk for, or principal impact of their business operations. Art. 15 (3) CSDDD obliges companies to link variable parts of directors’ remuneration to the achievement of this plan. The obligations to create such a climate action are not technically a part of the HREDD procedures. This means that the CSDDD rules in Art. 4-11 on mitigation, prevention of adverse impacts or complaints procedure will not apply to climate risks, as Art. 29 e also clarifies...
Towards a fairer globalisation
As the Directive’s MHREDD obligations extend beyond Europe, it will likely set new standards even beyond its actual scope of application through the so-called “Brussels effect”. This can open regulatory space to effectively regulate negative externalities on human rights and the environment caused by EU as well as non-EU companies, both in Europe and beyond, and help overcome recurrent issues such as the race to the bottom (deregulate to compete) and the regulatory chill (avoid regulation to avoid investor arbitration). It might push countries outside of Europe to regulate to avoid having a high human rights risk profile which will push away companies obliged to respect human rights under the European rules. As a result – and despite some shortcomings –, the CSDDD has the potential to foster a fairer globalisation by upholding human rights, labour and environmental standards throughout global value chains and facilitate the shift towards a just transition to a sustainable economy.
The Corporate Sustainability Due Diligence Directive (CSDDD) creates an innovative mix of enforcement mechanisms. It relies on both administrative oversight and judicial enforcement through civil liability. Additionally, accountability of businesses for affecting stakeholder interests is strengthened by a specific environmental, social, and corporate governance (ESG) duty of care for directors and obligations to link directors’ pay to climate obligations, thus ensuring that directors need to steer businesses in light of stakeholder interests. In general, this system has the potential to effectively oblige companies to respect stakeholder interests, although some weaknesses, especially in access to justice, remain...