Quick Take

Legal Developments in the EU

January 23, 2024

The European Union is moving on two fronts to force companies to take more responsibility for their effects on human rights and the environment. Companies based in the EU and those doing business in Europe need to get ready now to comply with these new legal requirements.

In December 2023, the European Parliament and Council announced a long-awaited agreement on the proposed Corporate Sustainability Due Diligence Directive (CSDDD). The directive obliges large companies to systematically assess and address risks relating to the protection of the environment and human rights in the EU and globally—in their own operations and in their supply chains. Failure to meet these obligations will result in substantial financial penalties by a designated national supervisory authority: up to five percent of a company’s net global turnover.

The agreement now awaits formal adoption by the Parliament and Council. Then it has to be converted into legal text, which may involve additional technical negotiations to define the specifics for companies. EU member states also need to translate the directive into national law. This means that it will still take a few more years for this groundbreaking directive to be impactful. But smart corporations prepare now and put in place the management and reporting systems that they will need to comply with these requirements.

Less talked about but on a faster legal trajectory is another EU directive—the Corporate Sustainability Reporting Directive (CSRD). Made effective in January 2023, the CSRD requires EU member states to work on a tight deadline to implement its provisions under their national laws and regulations. By July 6, 2024, national laws must require companies to prepare sustainability reports according to clear CSRD reporting guidelines. These reports must be assured by independent professional service firms that certify the compliance with the sustainability reporting standards, their underlying materiality assessment process, and certain reported indicators.

The CSRD requires companies to conduct a so-called double materiality assessment, which identifies risks to both the company itself and to rights holders affected by company operations. This novel requirement will force companies to assess and report on their business impact on people and the environment in a more rigorous way than ever before.

The CSRD will offer investors, trade unions, civil society organizations, and other watchdog organizations an opportunity to challenge companies’ public sustainability claims. Most importantly, companies will no longer be able to remain silent on issues that have already been identified as material for rights holders. This includes human rights risks in the informal sector such as artisanal mineral extraction, unauthorized subcontracting in the apparel industry, or the non-traceable production of agricultural goods that are linked to global supply chains of EU companies.

While the CSRD will increase transparency about corporate conduct, it will not automatically generate greater corporate accountability. For the CSRD to be effective, external organizations need to act upon the information that companies publish. These organizations, in turn, need sufficient resources and staffing to analyze company reports and, if necessary, demand improvements. Private philanthropy and foundations could step up and provide dedicated resources to make sure that watchdog organizations are able to push for making the directives effective.

Taken together, the EU’s regulatory initiatives provide a potential model for how to incentivize responsible business conduct. Governments around the world should consider emulating this promising approach.

Global Labor