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What is the Corporate Sustainability Due Diligence Directive (CSDDD)? Its importance for companies and the need to respond

table of contents

1. overview of CSDDD

The Corporate Sustainability Due Diligence Directive (CSDDD) is a legal regulation established by the European Union (EU) that requires companies to conduct human rights and environmental due diligence (DD). This directive requires companies to assess adverse impacts on human rights and the environment throughout their supply chains and to take preventive and corrective measures.It was formally adopted by the European Parliament on 24 April 2024.* 1)

The legal basis of the CSDDD is based on the "Guiding Principles on Business and Human Rights" published by the United Nations in 2011, and it is positioned as a framework for ensuring the sustainability of corporate activity. This requires companies to strengthen legal compliance while also working to improve their competitiveness in the international market.

2. Scope of CSDDD and target companies

(1) Regulated companies and scope of application

The CSDDD applies to EU companies with more than 1,000 employees and worldwide net sales exceeding € 4 million.In addition, companies outside the EU (including Japanese companies) are also eligible if they generated net sales of 4 million euros or more within the EU in the previous fiscal year.* 2)

The broad scope of application will affect many multinational companies, and Japanese companies are no exception. Companies operating in the EU market in particular need to check whether their company is directly subject to the law.

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(2) Impact on the entire value chain

A distinctive feature of the CSDDD is that due diligence obligations are imposed not only on individual companies but also on their entire supply chains, making companies responsible for managing environmental and human rights risks throughout their value chains, from upstream raw material suppliers to downstream sales networks.

This will require companies to closely examine not only their direct business partners but also their suppliers' management systems and efforts to reduce environmental impact, which will have an impact on companies' procurement strategies and partnership building.

3. Specific initiatives required by CSDDD

(1) Implementation of human rights and environmental due diligence (DD)

Companies are required to identify and assess the environmental and social risks posed by their business activity and take steps to avoid or mitigate these risks, including preventing forced labor and child labor, deforestation, and the overuse of water resources.

(2) Strengthening stakeholder engagement

Companies are required to engage in dialogue with stakeholders, including suppliers, employees, investors, and local communities, and ensure transparency in their due diligence processes. In particular, they are required to establish grievance mechanisms.

(3) Development and disclosure of transition plans

CSDDD requires companies to:They are required to develop and implement transition plans that are consistent with the 1.5°C target of the Paris Agreement and the EU's 2050 climate neutrality goal.Companies are required to Settings and disclose specific greenhouse gas reduction targets.

4. Impacts and risks of CSDDD

(1) Expansion of ESG investment

In recent years, ESG (Environmental, Social, and Governance) investment has expanded rapidly, and institutional investors and Financial Institution have made a company's sustainability response one of their evaluation criteria. By complying with CSDDD, companies can gain the trust of investors and make it easier to achieve sustainable growth.

(2) Strengthened legal regulations and risk of penalties

Companies that violate the CSDDD may be subject to sanctions * 3) , which could have a serious impact on the company's brand value and reputation. The specific penalties will be determined by each EU member state. Furthermore, as each country moves forward with the implementation of the CSDDD into domestic law, delays in response could lead to a decline in market competitiveness.

5. Actions that companies should take in the future

1. Check whether CSDDD applies

Conduct a detailed analysis of your company's regulatory scope.
Even if it is not directly targeted, it may have an indirect impact through the supply chain.think about.

2. Strengthening the due diligence system

Establish a framework for evaluating human rights and environmental impacts and conduct regular risk assessmentsimplement.
We will clarify standards for supplier management and work with our business partners to reduce risks.

3. Formulation and disclosure of transition plan

Formulate climate change measures consistent with the goals of the Paris Agreement.
Specific reduction targets and implementation plans will be formulated and disclosed transparently.

6. Summary

CSDDD is a very important legal regulation from the perspective of sustainable corporate growth and risk management, and compliance is essential for companies involved in the EU market in particular.The CSDDD is scheduled to be implemented in stages from July 26, 2027 * 4) , so companies need to start preparing in anticipation of the implementation date..

Not only companies that are subject to the CSDDD but also companies that are part of the supply chain will need to prepare for the upcoming tightening of regulations. Preparing for the CSDDD is the key to sustainable business management.

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[Reference source]
* 1,2, 3) Official website of the European Parliament"Due diligence: MEPs adopt rules for firms on human rights and environment"https://www.europarl.europa.eu/news/en/press-room/20240419IPR20585/due-diligence-meps-adopt-rules-for-firms-on-human-rights-and-environment
* 4) EU Council Official Document(Document number: ST 6145/2024)https://data.consilium.europa.eu/doc/document/ST-6145-2024-INIT/en/pdf