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The Corporate Sustainability Due Diligence Directive (CSDDD) just entered into force. Therefore, we wanted to provide companies with a Step-by-Step Guide to help them comply with the CSDDD. The directive was signed on June 13, 2024, and was published in the Official Journal of the European Union on July 5, 2024. Today is the first day it is in force and EU member states have until July 26, 2026, to transpose the directive into their national laws.
The CSDDD mandates that companies integrate due diligence processes to identify, prevent, and mitigate adverse impacts on human rights and the environment throughout their supply chains. This comprehensive directive covers issues such as child labor, environmental degradation, and corruption. Companies are expected to establish and enforce policies that ensure ethical behavior throughout their supply chains, thus promoting long-term sustainability and high ethical standards.
In comparison, the German Supply Chain Due Diligence Act (LkSG) already imposes rigorous due diligence requirements on companies within Germany. However, the introduction of the CSDDD means that the German government will replace the LkSG with the CSDDD, aligning national regulations with the broader EU framework. For companies operating in Germany, this transition will require them to adjust their compliance strategies to meet the specific provisions of the CSDDD.
1. Understanding the CSDDD
The CSDDD aims to fundamentally transform how companies approach their impact on human rights and the environment. At its core, the CSDDD requires companies to embed comprehensive due diligence processes into their business operations and supply chains. The directive focuses on identifying, preventing, and mitigating adverse impacts, ensuring that companies take proactive steps to address issues such as human rights abuses, child labor, environmental degradation, and corruption.
The CSDDD outlines specific obligations for companies, including conducting thorough risk assessments to identify potential and actual adverse impacts, implementing preventive measures, and establishing grievance mechanisms. Companies are also required to monitor the effectiveness of their due diligence strategies and regularly report on their efforts and outcomes. This transparency and accountability framework not only ensures compliance but also promotes a culture of ethical business practices and long-term sustainability.
Moreover, the directive places a strong emphasis on stakeholder engagement, urging companies to consult with affected communities, workers, and other relevant parties. This inclusive approach ensures that the voices of those directly impacted by corporate activities are heard and addressed. By adhering to the CSDDD, companies will align with the EU's commitment to fostering responsible corporate behavior and contribute to the broader goal of sustainable development.
After understanding the regulatory context and core requirements, companies can then conduct a baseline assessment, identify risks, and engage stakeholders. Developing a compliance strategy involves setting objectives, allocating resources, and creating an implementation roadmap. The article further details how to implement necessary measures, monitor progress, and ensure continuous improvement to meet CSDDD standards effectively.
2. Initial Preparation Steps
Proper preparation is crucial for compliance. These initial steps help companies lay the groundwork for an effective due diligence process.
Conducting a Baseline Assessment: Begin by evaluating your current practices. Identify existing policies, procedures, and any gaps related to the CSDDD. For instance, a manufacturing company should audit its sourcing practices to ensure alignment with environmental standards. This assessment will provide a clear picture of where improvements are needed.
Risk Identification: Assess potential environmental, social, and governance (ESG) risks within your supply chain. For example, a textile company should check labor practices and environmental impacts at each stage of its supply chain. Understanding these risks allows for the development of targeted mitigation strategies.
Stakeholder Mapping: Engage key stakeholders, including suppliers, customers, employees, and regulatory bodies. Early engagement provides valuable insights and fosters collaboration. For example, a food processing company can gain critical feedback on its sourcing practices from stakeholders, enhancing transparency and trust.
By following these initial steps, companies can establish a robust foundation for their due diligence processes, ensuring compliance with the CSDDD and promoting sustainable and ethical business practices.
3. Developing a Compliance Strategy
With a clear understanding of current practices and risks, the next step is to develop a comprehensive strategy for compliance.
Setting Objectives and KPIs: Establish clear goals and key performance indicators (KPIs) for compliance. For example, aim to ensure that 100% of suppliers meet environmental standards within two years. KPIs might include the number of supplier audits conducted and the corrective actions taken.
Resource Allocation: Determine the necessary budget, personnel, and resources for compliance. A large corporation might allocate funds for compliance software and extensive training programs, while smaller firms might focus on hiring dedicated sustainability experts to drive their compliance efforts.
Implementation Roadmap: Create a detailed timeline for implementing the required measures. This roadmap should include key milestones, responsible parties, and deadlines. For instance, a retail company might set quarterly targets for auditing suppliers and implementing corrective actions, ensuring steady progress towards full compliance.
By setting clear objectives, allocating appropriate resources, and establishing a structured implementation plan, companies can effectively navigate the path to compliance with the CSDDD, fostering sustainable and responsible business practices.
4. Implementing Necessary Measures
Implementing your strategy involves integrating new processes and ensuring everyone in your organization understands their role.
Establishing Due Diligence Processes: Develop and embed due diligence procedures into your operations. For example, a technology company might implement regular audits of its supply chain to ensure compliance with labor and environmental standards. These procedures should be thorough and consistently applied to maintain high standards across the board.
Supply Chain Management: Integrate ESG criteria into your supplier selection and management processes. For instance, an electronics manufacturer might require all suppliers to adhere to stringent environmental and labor standards and provide regular compliance reports. This ensures that ESG considerations are embedded throughout the supply chain, promoting overall sustainability.
Training and Awareness: Implement extensive training programs for employees and suppliers on CSDDD requirements. A logistics company, for example, could conduct workshops to educate staff and suppliers on identifying and mitigating ESG risks. Ensuring that everyone is informed and engaged is crucial for successful compliance.
By establishing robust due diligence processes, incorporating ESG criteria into supply chain management, and promoting training and awareness, companies can effectively integrate their compliance strategies and foster a culture of sustainability and responsibility.
5. Monitoring and Reporting
Ongoing monitoring and reporting ensure your company remains compliant and can address issues as they arise.
Setting Up Monitoring Systems: Implement continuous monitoring systems to track compliance. For instance, a pharmaceutical company might use compliance management software to monitor supplier practices and ensure adherence to ESG standards. These systems enable real-time oversight and quick responses to any compliance issues.
Conducting Internal Audits: Regularly review and audit your compliance processes. Internal audits help identify gaps and areas for improvement. For example, a construction firm might conduct annual audits of its suppliers to ensure they meet labor and environmental standards. This systematic review supports ongoing improvement and adherence to the CSDDD.
Reporting Compliance: Prepare and submit compliance reports as required by the CSDDD. These reports should detail the steps taken to comply with the directive, risks identified, and mitigation actions implemented. A financial services firm, for instance, might submit an annual sustainability report outlining its due diligence efforts and compliance status. Clear and thorough reporting demonstrates accountability and transparency.
By setting up robust monitoring systems, conducting regular internal audits, and diligently reporting compliance, companies can maintain adherence to the CSDDD and address any issues proactively.
6. Continuous Improvement
Compliance with the CSDDD is not a one-time effort but an ongoing process that requires regular updates and enhancements. Establishing robust feedback mechanisms is important for continuous improvement. Companies should actively gather feedback from stakeholders, including suppliers, employees, and customers, to identify areas for improvement. Additionally, it's important to regularly review and update compliance strategies based on new insights and regulatory changes. This proactive approach ensures that the company remains compliant and can adapt to evolving standards, ultimately fostering long-term sustainability and operational efficiency.
Conclusion
Preparing for the CSDDD involves a comprehensive approach, from understanding the regulatory context to implementing robust due diligence processes and continuous improvement strategies. By following these steps, companies can ensure compliance, mitigate risks, and enhance their sustainability practices. Proactive preparation and adherence to best practices will position businesses for long-term success in the evolving regulatory landscape.
On March 15, 2024, the European Council reached an agreement on the Corporate Sustainability Due Diligence Directive (CSDDD). The Belgian Presidency of the European Council circulated an adapted proposal for the CSDDD as a final attempt to reach an agreement among the Member States and with success: the required (qualified) majority was achieved within the European Council. The formal adoption of the CSDDD by the Members of the European Parliament is expected in April 2024.
But how does this directive differ from the German Supply Chain Due Diligence Act (LkSG)? And how do they relate to each other? In this blog post, we will highlight the similarities and differences between the CSDDD and the LkSG.
Exploring Similarities Between LkSG and CSDDD: Seeking Common Ground
Both laws aim to hold companies accountable and oblige them to organize their supply chains responsibly. Both the Supply Chain Due Diligence Act (LkSG) and the Corporate Sustainability Due Diligence Directive (CSDDD) set out comprehensive due diligence obligations for human rights and environmental protection along the supply chain. This means that companies are obliged to identify and report on the potential negative impacts of their business activities and to take measures to minimize or prevent negative impacts. Both laws also provide for sanctions that companies face if they violate the stipulated regulations. This can include fines and exclusion from public contracts.
Highlighting Contrasts: Key Differences Between LkSG and CSDDD
The main difference between the German Supply Chain Due Diligence Act (LkSG) and the EU Corporate Sustainability Due Diligence Directive (CSDDD) lies in their scope of application and legal structure. The LkSG applies to companies of any legal form in Germany and is staggered according to company size, whereby it has applied to companies with more than 3,000 employees since 2023 and to companies with more than 1,000 employees since January 2024.
In contrast, the CSDDD applies gradually to corporations in the EU and to non-EU companies that exceed a specified number of employees and a turnover threshold in the EU single market. Large companies with more than 5,000 employees and a minimum turnover of 1.5 billion euros are obliged to comply with the directive three years after its enactment, likely in 2027. Companies with more than 3,000 employees and a minimum turnover of 900 million euros have four years (potentially until 2028), and companies with more than 1,000 employees and a minimum turnover of 450 million euros have five years (potentially until 2029 2029) until they are subject to the law.
Another difference involves the specific requirements and concerns covered by the laws. While the LkSG focuses primarily on human rights and direct environmental risks, the CSDDD expands its scope to include additional environmental concerns such as climate targets, the protection of flora and fauna and the minimization of environmental impacts along the “chain of activity”. The "chain of activity" includes all upstream activities that are related to the production of goods, the company’s own operations and downstream activities for distribution, transport and storage for direct business relationships. Usage and disposal of the product are not in scope.
Furthermore, there are distinctions regarding liability within the two laws. While the LkSG does not provide for civil liability, the CSDDD does, but only within its own sphere of influence and in accordance with the provisions of the German Civil Code (BGB). There are also differences in the sanctions: While the LkSG provides for fines of up to 2% of annual turnover and exclusion from public sector contracts, the CSDDD provides for fines of up to 5% of annual turnover, in addition to publication of the infringement and a ban on the marketing or export of products and services.
Wrapping Up: Key Takeaways from the Comparison of LkSG and CSDDD
In conclusion, the comparison between the German Lieferkettensorgfaltspflichtengesetz and the EU Corporate Sustainability Due Diligence Directive reveals significant similarities and differences. While both aim to hold companies accountable for their supply chains, the LkSG applies to German companies based on employee count, whereas the CSDDD applies to specific company forms across the EU, based on employee count and turnover. Additionally, the CSDDD extends its scope to address a broader range of human and environmental concerns along the upstream and partially downstream supply chain. Understanding these distinctions is crucial for businesses navigating compliance and sustainability efforts in the evolving regulatory landscape.
