CSDDD changes the way companies implement Due Diligence

Tuesday 8 August 2023

What is due diligence?

Due diligence is a continuous process in which human rights and environmental issues in a companies' value chain are identified, prevented, mitigated, and addressed. Implementing due diligence helps enterprises avoid and address adverse impacts related to workers, human rights, the environment, bribery, consumers and corporate governance that may be associated with their operations, supply chains and other business relationships (OECD Guidelines).  

Why is due diligence important in the business context?

Companies are increasingly being held accountable for environmental and human rights violations and being fined accordingly. For instance, Shell has to pay $15 million in a settlement over oil spills in Nigeria for which they are responsible. This can cause reputational damage for a company, which in turn can have a significant financial impact.  
All over the world, people are still facing a lot of human rights issues. Human rights include labor rights, civil and political rights, economic, social and cultural rights, and the protection of vulnerable groups. These rights are not guaranteed, and unfortunately frequent violations take place in business contexts. This shows the importance of prioritizing the wellbeing of people and the environment over profit.   
A proper due diligence system can help companies prevent such violations of human rights and the environment. 

The European Commission adopted a Corporate Sustainability Due Diligence Directive (CSDDD). What is the CSDDD? 

The CSDDD aims to foster sustainable and responsible corporate behavior in companies' activities and governance structures. It is a legislative structure in Europe, which introduces requirements for companies to identify, prevent, mitigate and address actual and potential impacts of their business activities on the environment and human rights (for more information, refer to our previous blog).  

When does the CSDDD come into effect? 

The directive is expected to come into effect in 2024. Until then, tripartite negotiations are taking place between the European Parliament, European Council, and the European Commission to finalize the directive. 2026 is the earliest date for the directive to apply for large companies under NFRD. 

What are the most important implications of the CSDDD for companies? 

  • CSDDD establishes a corporate due diligence duty that covers identifying, preventing, mitigating and accounting for negative human rights and environmental impacts in company’s own operations, their subsidiaries and their value chains
  • CSDDD also introduces duties for the directors that include setting up and overseeing the implementation of the due diligence processes and integrating due diligence in corporate strategy
  • CSDDD introduces a link between variable remuneration of directors and the sustainability targets of the company
  • Directors are expected to consider the consequences of their decisions with respect to sustainability matters, climate change and human rights
  • Directors are responsible for the implementation and overseeing due diligence actions such as policy, identification, prevention, complaint procedure and monitoring
  • Companies are expected to adjust and align their business plan with transition to a sustainable economy and 1.5-degree Paris Goal.

The OECD Guidelines for Multinational Enterprises outline the steps to be taken in the due diligence process, which are also leading in the CSDDD:  200120-figuur-6-due-diligence-stappen-en.jpg 
Source: OECD-Due-Diligence-Guidance-for-Responsible-Business-Conduct.pdf 

How do my companies’ efforts towards the CSRD relate to the new CSDDD?  

Companies should bear in mind that the Corporate Sustainability Reporting Directive (CSRD) is designed to embed due diligence throughout the requirements. This means that if companies have to comply with the CSRD and corresponding European Sustainability Reporting Standards (ESRS), this should help them in complying with the CSDDD. Additionally, the due diligence cycle can be a useful input to the assessment of risks in the double materiality exercise of a company. The themes that surface as a result of proper due diligence can provide important guidance for the key impacts that should be prioritized according to double materiality. This shows that the companies can focus on implementing a due diligence system in tandem with complying with the new CSRD.  

What is a common challenge in effectively implementing a due diligence process? 

A common challenge in the Human Rights Due Diligence cycle is to properly include the voices of relevant stakeholders and rightsholders, as well as making sure they have access to appropriate grievance mechanisms for voicing their concerns. Especially those people whose rights are affected by business undertakings might be hard to reach, for instance due to cultural barriers in the countries where they operate.  

What are the first steps to take?

The OECD due diligence process provides insight into the steps. The first step is to embed responsible business conduct into policies and management systems.  
Next, identify and assess environmental and human rights issues that are the most salient to your company and your value chain. This can be done through existing sector research or performing a dedicated human rights impact assessment to identify the most salient issues.  
Companies can also use the outcomes of stakeholder consultations and grievances to identify and assess relevant issues.  
In the long run, having a sounds due diligence system in place will allow companies to make a positive societal contribution.

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Due Diligence | OECD Guidelines | National Contact Point OECD Guidelines 
Shell to pay 15 mln euros in settlement over Nigerian oil spills | Reuters 
Corporate sustainability due diligence (europa.eu)