On July 5, 2024, the European Union’s (EU) Corporate Sustainability Due Diligence Directive (CSDDD) was issued, requiring member states to incorporate it into their national laws by July 26, 2026, with a gradual implementation plan over the following years. The primary objective of CSDDD is to encourage companies to adopt sustainable and responsible practices, not only in their immediate operations, but throughout their global supply chains. The new regulations mandate that affected companies assess and address potential adverse effects of their operations on human rights and environmental conditions, not only within Europe but also internationally.
CSDDD will impact entities with EU-wide annual net revenue over €450 million (EU-based entities must also have at least 1,000 employees), EU entities with yearly franchising fees/royalties of €22.5 million or more, and net revenue exceeding €80 million, and non-EU entities meeting these EU-based franchising/royalty revenue thresholds.
Most major US companies will be subject to these rules, either through their European subsidiaries’ revenue or their global sales and EU exports. The largest multinational enterprises (MNEs) must comply by 2027. A US MNE consists of a US parent company and its foreign affiliates. A US parent is a US resident that owns at least 10% of a foreign business enterprise, which is called a foreign affiliate. If US parents directly or indirectly own more than 50% of a foreign business, it is considered a majority-owned foreign affiliate.
The directive’s due diligence obligations extend beyond directly affected companies to their supply chains, distribution networks, and other business partners. This means many smaller firms, including US companies not directly covered, will feel indirect impacts from the human rights, environmental, and climate change provisions. It is important that these firms be prepared for due diligence requests in response to existing obligations under CSDDD, which has wider applicability.
CSDDD Impact
US companies need to be attentive to the fact that CSDDD mandates companies to identify and address environmental and social issues within their supply chains, face potential civil legal consequences for inadequate action, enhance transparency regarding due diligence and risk management efforts which includes publishing annual stability reports, and provide easily accessible online information. In addition, the directive introduces more stringent privacy and data protection regulations, increased transparency requirements for hiring practices, stronger mandates for workplace safety, and stricter environmental impact regulations across the entire value chain.
US companies must evaluate how the directive could potentially impact their global operations, monitor ongoing developments as CSDDD is incorporated into domestic legislation, and utilize the interim period to ready themselves for the regulatory challenges ahead.
CSDDD Benefits
While US companies must comply with CSDDD or face negative consequences, they may also find benefits from the new directive. Those embracing the new EU legislative framework will find that it offers numerous advantages for creating, maintaining, and expanding globally successful enterprises. These business benefits can include:
- Risk mitigation: Companies that follow corporate sustainability guidelines will avoid large fines and possible lawsuits that could harm their finances and reputation.
- Meet market demands: Strong environmental and human rights commitments can increase customer engagement, and potentially grow customer base and income.
- Attract skilled workers: Clear human rights policies appeal to top talent looking for ethical employers, improving hiring efforts.
- Get ahead of competitors: Complying early puts companies in a better position than slower competitors, reducing business disruptions and improving their global standing.
By proactively aligning with these new standards, companies can navigate the evolving regulatory landscape while simultaneously enhancing their market position and stakeholder relationships.
CSDDD Compliance
US companies should begin the process of preparing for CSDDD now with a comprehensive evaluation of existing policies and procedures to ensure they align with the new EU regulations. This should include conducting a thorough due diligence assessment on human rights, environmental, social, and governance (ESG) standards, and third-party risks to identify potential compliance issues. In order to prepare for compliance, US companies can:
- Educate staff thoroughly on the new compliance requirements, and upgrade data management systems to meet EU privacy standards. (For example, GDPR)
- Implement fair and inclusive hiring and promotion practices across global operations, adhering to EU directives that exceed current industry norms.
- Establish robust due diligence processes for monitoring, and reporting on ESG and human rights impacts.
- Adopt sustainable supply chain and operational practices company-wide that fully comply with new EU directives, ensuring end-to-end adherence.
CSDDD Noncompliance
US companies that fail to comply with CSDDD can face severe consequences. The potential costs and risks are immense, ranging from hindering operations to potentially forcing a company to close. These negative outcomes consume resources, damage reputations, and will negate the advantages of compliance. Companies that do not comply will find themselves potentially facing significant financial penalties, legal challenges and litigation, erosion of brand image and customer confidence, and challenges in attracting and keeping skilled employees, among other negative consequences.
Canopy Edge helps our clients navigate the rapidly changing sustainability environment. Our experienced consultants can help you not only comply with CSDDD, but also benefit from embracing the regulation. To find out more about getting started on your sustainability journey, contact Canopy Edge for an assessment of how we can design an engagement that meets your organization’s most important needs at a scope and price point that are the best fit for your company.
