Written by Johanna Leffler

 

Introduction

In July 2024, the European Union’s (“EU”) Corporate Sustainability Due Diligence Directive (“CSDDD” or “Directive”) entered into force.1See Directive 2024/1760, of the European Parliament and of the Council of June 13, 2024 on Corporate Sustainability Due Diligence and Amending Directive 2019/1937 and Regulation 2023/2859, 2024 O.J. L. [hereinafter CSDDD].  Among its primary goals, the Directive aims to ensure that companies active in the EU market contribute to sustainable development and bringing an end to adverse human rights and environmental impacts flowing from their own operations, those of their subsidiaries, and those of business partners in their “chain of activities.”2Id. at 3–4.  In light of the Directive’s obligations, in-scope Multinational Entities (“MNEs”) should begin engaging with their suppliers and seek out contractual assurances of compliance from upstream business partners now.

EU Member States will have until July 26, 2026 to adopt laws and regulations within their national frameworks necessary to comply with the Directive.3Id. art. 37(1). In 2027, the transposed rules will begin to apply to companies within the scope of the Directive gradually over the following three to five years.4See European Commission Directive on Corporate Sustainability Due Diligence: Frequently Asked Questions, at 5–6. There are three categories of in-scope companies: (1) European companies operating in the EU with an annual group-wide net turnover of € 450 million and at least 1,000 employees, (2) non-European companies operating in the EU with an annual group-wide net turnover of € 450 million, and (3) both European and non-European franchised companies with at least € 80 million in turnover and € 22.5 million in royalties, with at least 1,000 employees at qualifying European companies.5CSDDD arts. 2(1)–(2); see also David Lakhdhir, The EU Due Diligence Directive: Implications for U.S. Companies, ABA (July 15, 2024), https://www.americanbar.org/groups/business_law/resources/business-law-today/2024-july/eu-due-diligence-directive-implications-us-companies/?utm_source=sfmc&utm_medium=email&utm_campaign=MK20CNTT&promo=MKCONTENT1&utm_id=896473&sfmc_id=350695973. The European Commission (“EC”) estimates that the Directive will eventually apply to about 6,900 companies.6Eur. Comm., Corporate Sustainability Due Diligence: Fostering Sustainable and Responsible Corporate Behavior for a Just Transition Towards a Sustainable Economy, https://commission.europa.eu/business-economy-euro/doing-business-eu/sustainability-due-diligence-responsible-business/corporate-sustainability-due-diligence_en (last visited Nov. 4, 2024). In the meantime, it is critical that companies begin assessing potential adverse impacts that may arise from the operations of business partners in their “chain of activities,” as well as their own.

The “Chain of Activities” Expanded Approach – Upstream Business Partners are on the Hook

Of chief importance is the Directive’s concept of the “chain of activities.”  This expands the scope of a company’s responsibility to include the operations of upstream business partners connected to their production of goods and provision of services, in addition to their own operations and those of their subsidiaries.7See CSDDD arts. 3(1)(f)–(g). This includes business partners involved in the design, extraction, sourcing, manufacturing, transportation, storage, supply of raw materials, products or parts, and the development of the product or service itself.8See id. art. 3(1)(g)(i). As such, in-scope MNEs should be prepared to conduct in-depth assessments of every tier in their “chain of activities” to determine the human rights and environmental risks at each stage and adapt their due diligence policies accordingly.  MNEs should begin to establish compliance management systems now, and consider the benefits of a digital whistleblower system and close cooperation with the supervisory authorities to be established under the Directive.

The Directive creates a higher level of due diligence by requiring States to enact national laws imposing binding obligations on corporations.  This demonstrates a departure from non-legally binding principles such as the U.N. Guiding Principles for Business and Human Rights, the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, and the OECD Due Diligence Guidance for Responsible Business Conduct.9See Jennifer Kwao, The EU’s Corporate Sustainability Due Diligence Directive Explained, Climate Action Network Eur., Aug. 27, 2024, at 3 [hereinafter CAN August 2024 Briefing]. Obligations outlined in these voluntary international agreements will now be directly legally binding on in-scope companies through the Directive.10See id. at 3. Member States must ensure that companies integrate risk-based human rights and environmental due diligence, and risk-management programs into their policies.11See CSDDD arts. 5, 7–11. This should be done by assessing potential adverse impacts arising from their own operations and, critically, those of business partners in their “chain of activities.”12See id. Companies shall carry out risk assessments of business partners in their “chain of activities” on the implementation and effectiveness of measures intended to minimize negative impacts on the environment and human rights at least every 12 months.13See id. art. 15.  In-scope companies should also be prepared to adopt a climate change mitigation transition plan based on a sustainable business model in line with the EU’s transition to a sustainable economy in support of its Paris Agreement obligations.14See id. art. 22(1).

Proactive Compliance & Cooperation

Besides preparing risk assessments of their “chain of activities” and beginning to set up compliance management systems, MNEs should begin engaging with their suppliers and seek out contractual assurances of compliance from upstream business partners. Contractual assurances are not only a required appropriate measure companies must seek under Article 10 of the Directive, but can further insulate MNEs from being held liable for partners that intentionally or negligently fail to comply with the Directive’s requirements.15See id. arts. 10(2)(b), 29(1) (requiring companies seek contractual assurances from direct business partners to ensure they comply with the company’s new code of conduct in accordance with the Directive). Moreover, engaging with suppliers now can help MNEs conduct cost benefit risk analyses to determine whether current suppliers will cooperate with their updated code of conduct rather than jeopardizing the company’s business in the EU by bringing it under the scrutiny of a Member State’s supervisory authority.

Article 24 of the Directive requires that each Member State designate one or more supervisory authority to oversee compliance with the Directive’s obligations by companies in their State.16See id. art. 24. Member States have until July 2026 to inform the EC of it the designated supervisory authority, which is required to exercise their powers impartially and with respect for obligations of professional secrecy.17Id. art. 24(9).  Because supervisory authorities will have the power to carry out investigations to determine whether companies and upstream business partners are complying with the Directive’s obligations, companies may consider incorporating reporting channels such as digital whistleblower systems to encourage transparency and cooperation with supervisory authorities, and to protect themselves from liability under the Directive.

Conclusion

While many large MNEs already seek to comply with business and human rights principles, international sustainable business laws and regulations targeted at corporate social responsibility are only expected to increase.18See BSR, Laws and Regulations for Just and Sustainable Business: BSR FAQ (July 2023), https://www.bsr.org/en/prs/laws-and-regulations-for-just-and-sustainable-business. By proactively complying with this Directive and enacting new due diligence mechanisms, MNEs will be prepared to seamlessly transition when future regulations emerge.  Carving out these practices now can help companies reduce costs, increase efficiency, and highlight a commitment to responsible business for socially conscious consumers.19See RSB Env’t, Why is it Important for Companies to Protect the Environment? (June 1, 2023), https://rsbenv.com/why-is-it-important-for-companies-to-protect-the-environment.

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