Corporate Sustainability Due Diligence Directive (CSDDD)
Due diligence obligation of companies
The European Commission published its proposal for due diligence directive for companies on 23 February 2022. The directive aims to promote sustainable and responsible business conduct in global value chains and to make the protection of human rights and the environment an integral part of business operations and governance.
Companies play a key role in building a sustainable society and economy. The new regulation requires companies to take into account the effects of their operations in the entire value chain. This includes their own activities and those of their subsidiaries and established business partners in and outside the EU.
The due diligence obligation promotes the protection of human rights and the environment and increases consumers’ trust in companies. For companies, the proposed directive aims to ensure a level playing field throughout the EU and to enable more effective identification and management of risks in a transparent manner. Because the value chains of European companies extend beyond the internal market, the proposal also benefits developing countries. The regulation would protect workers against human rights violations in these countries, improve their living conditions in general and enable new sustainable investments.
Companies under the regulation
The proposed directive would apply to the following companies:
- EU limited liability companies with more than 500 employees and a worldwide turnover exceeding EUR 150 million
- Other EU limited liability companies operating in the high-impact sectors and that have more than 250 employees and a worldwide turnover exceeding EUR 40 million
- Non-EU companies operating in the EU that exceed the above-mentioned thresholds for turnover in the EU area.
Small and medium-sized enterprises (SMEs) are not covered by the regulation, but the proposed directive provides support to SMEs that may be indirectly affected by the regulation.
Under the proposed due diligence regulation, companies would be required to identify, prevent, end or mitigate adverse impacts of their activities on human rights and the environment. The obligations would also apply to companies’ value chains and subsidiaries. In addition, certain large companies would be required to draw up a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement. The proposal also introduces duties for company directors.
Under the due diligence obligation, companies must:
- integrate due diligence into their policies
- identify actual or potential adverse human rights and environmental impacts
- prevent or mitigate potential impacts
- eliminate or minimise actual impacts
- establish and maintain a complaints procedure
- monitor the effectiveness of the due diligence measures
- publicly communicate on due diligence.
Finland supports the proposed directive’s provisions on due diligence obligations in key respects. The proposal would harmonise regulation of companies operating in the EU and create a level competitive playing field for them. Finland considers it important that regulation is clear and that it is realistic for companies to implement. The regulation must be sufficiently unambiguous to avoid the fragmentation of the directive’s implementation and application in different Member States.
Finland supports the regulation’s proposed scope of application. The regulation should take into account the operating conditions of SMEs as part of value chains of large companies, and support should be offered to SMEs to meet their obligations.
The proposal also complements the EU’s environmental regulation in a necessary way by extending the duty to comply with obligations to companies’ value chains in countries outside the Union too. Finland considers that the mitigation of climate change should be included in the due diligence obligation. Finland’s most critical opinions concern the proposal’s compensation mechanism and the duty of company directors to consider the consequences of their decisions for sustainability when acting in the company’s best interests.
The European Parliament and the Council of the EU are currently discussing the proposal. Czech Republic, which currently holds the Presidency of the Council of the EU, aims to reach a general approach on the proposal during its Presidency. After the directive has been adopted, the Member States have a two-year transition period to implement it nationally.
- European Commission press release, 23 March 2022: Just and sustainable economy: Commission lays down rules for companies to respect human rights and environment in global value chains
- Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937
- Government communication to Parliament on the Commission’s proposal (in finnish)
- News item, 5 May 2022:Government supports Commission’s proposed legislation on corporate social responsibility
- Information on parliamentary proceedings (in finnish)
Sami Teräväinen, sami.teravainen(at)gov.fi and Laura Pätsi, laira.patsi(at)gov.fi