Business leaders today are inundated with enduring, emerging, and unknown risks to their company. As ambitious sustainable business practices become law, leaders must now also focus on the risks their businesses and value chains pose to people and the environment. Chief Sustainability Officers (CSO) are rising in prominence as key expert advisors to Chief Executive Officers and boards alongside financial and legal executives with traditional responsibility for risk management.
The recent adoption of the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) is the latest and arguably most significant regulatory development aimed at reshaping business practices to support, not undermine, sustainability. The CSDDD codifies international sustainability due diligence standards in the EU (and beyond) by requiring large companies to assess and address negative impacts on people and the environment in their value chains, and it helps level the playing field for sustainability leaders.
Translating the CSDDD into practice will require innovation. Traditional legal risk mitigation strategies will not meet the expectations of stakeholders, such as trade unions or civil society organizations, who will be empowered to bring direct claims for damages against companies. Such strategies will also struggle to deliver on the long-term business value of a strategic approach to sustainability risks.
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Effectively responding to the CSDDD requires a deep understanding of sustainability due diligence, human rights, climate, and nature-related topics, as well as addressing the diverse perspectives of affected stakeholders.
To stay ahead, corporate executives should recognize that compliance with the CSDDD can be transformational—driving improved outcomes for people and planet and helping to deliver, rather than hinder, each company’s sustainability aspirations and long-term value. Achieving this entails understanding not just what the Directive requires, but also its underlying drivers, what difficult questions must be asked, and how the company's core business model and strategy can enable improved outcomes for people and planet.
What Business Leaders Need to Know
CSDDD Adoption: A New Era for Environmental and Human Rights Due Diligence
On May 24, 2024, the CSDDD was officially adopted. It applies to EU-incorporated companies with €450 million in global revenue and 1,000 employees, as well as companies incorporated elsewhere with €450 million in revenue generated in the EU. Thousands of companies (an estimated 5,000+ EU companies), including companies in the financial sector, are affected. Indirectly, countless others are impacted as obligations to manage impacts linked to business partners cascade through global supply chains, driven by increased contractual requirements and requests for sustainability-related information.
Companies must “know and show” how they address their adverse impacts, with civil liabilities and financial penalties for those who fail to comply. The scope of due diligence extends to own activities, supply chain (up to raw materials), and downstream activities related to transport, storage, and distribution. This means identifying and assessing a company’s actual and potential impacts on human rights and the environment and taking action to prevent, mitigate, remediate, and account for these. While downstream impacts (e.g., linked to the end use of products and services) are mostly out of scope, by 2026, the EU Commission is due to report on whether tailored due diligence requirements for financial services and investment activities are necessary.
The CSDDD establishes a distinct regulatory obligation for companies to adopt and implement climate transition plans that include science-based, time-bound targets covering Scope 1, 2, and 3 GHG emissions for 2030—and then every five years until 2050. This is aligned with the obligation to disclose climate transition plans under the EU Corporate Sustainability Reporting Directive (CSRD) and goes further by requiring companies to adopt and implement such plans—creating a de facto obligation to conduct climate due diligence to assess and address a company’s impact on climate. The CSDDD acknowledges the interdependent nature of human health, domestic and wild animals, plants, and the wider environment by requiring companies to address environmental degradation that results in adverse impacts on human rights.
The nature of the CSDDD will require many businesses to go beyond current practices—or formalize and expand voluntary practices to new issues and parts of their value chains. Companies will be required to engage with affected stakeholders, for example, through ongoing engagement with workers, local communities, consumers, and environmental and human rights institutions to identify and manage the negative externalities of their business and relationships. This requires a mature approach to transparency: not only disclosing issues or initiatives that a company is comfortable with sharing, but being open about challenges, stakeholder grievances, and what isn’t working yet.
Complying with the CSDDD involves resetting business understanding of the concept of due diligence. Not as business due diligence (focused on identifying business related risks in a transaction) or traditional environmental due diligence (focused on compliance with specific, environmental contamination laws at site level) but about focusing on all of the company’s impacts on people and the planet, and continuously prioritizing action on those most severe and likely impacts across the company’s value chain, regardless of business risk.
Latest Developments
Building on EU Efforts to Regulate Responsible Business Conduct
The CSDDD is a game-changer for just and sustainable business. It is explicitly grounded in existing international soft law standards regarding responsible business conduct: the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles in Business and Human Rights (UNGPs). Both endorsed by governments across regions, these standards provide a widely adopted roadmap for respecting human rights and the environment through robust corporate policies, governance structures, due diligence systems and processes, and effective grievance mechanisms.
The CSDDD also seeks to harmonize due diligence requirements in response to slightly varying due diligence laws in France and Germany (and plans for similar laws in other countries such as Belgium, the Netherlands, and Spain). By setting a common floor for sustainability due diligence, the CSDDD will level the playing field for companies operating in the EU, although the flexibility afforded to member states to go beyond the requirements of the CSDDD leaves room for some continued differences.
The CSDDD was also designed to play an essential and complementary role in the EU’s sustainability architecture. Along with the Corporate Sustainability Reporting Directive (CSRD), the CSDDD forms part of the EU’s policy to foster “An Economy that Works for People” and relates to the objectives of the European Green Deal. The CSDDD complements the CSRD which mandates reporting of material impacts on people and the environment. The CSDDD mandates the process by which companies must identify and address (i.e., prevent, mitigate, cease, or remediate) those material impacts.
The CSDDD’s broad due diligence approach should also be considered alongside other more narrowly focused EU regulations, such as the Conflict Minerals, Batteries, and Timber Regulations as well as the EU’s Regulation Prohibiting Products Made with Forced Labour. The EU Regulation on Deforestation-free Products recognizes this and expects the more specific deforestation due diligence requirements to sit alongside the overarching due diligence obligations in the CSDDD.
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