Quick Take

Challenges Ahead: Implementing the EU Corporate Sustainability Due Diligence Directive

Michael Posner

May 28, 2024

Last week, representatives of the 27 EU member states voted to endorse the Corporate Sustainability Due Diligence Directive., which will require large companies to identify and address environmental and human rights problems throughout their global supply chains. The CSDDD has been the subject of prolonged and often heated debates among governments, companies, unions and other civil society groups for the last four years. Earlier this spring, as negotiations stalled, there was real doubt about whether it would ever be adopted. Now that it has, EU member states have signaled their intent to demand more responsible business conduct globally.

The adoption of this broad directive lays the foundation for more ambitious government regulation of global supply chains, but it is only a starting point. Over the next two years, EU countries will be required to incorporate the CSDDD framework into national laws. A few, including Germany and France, already have enacted relevant laws, but they will need to be harmonized with CSDDD requirements. Once the national laws are in place, governments will almost certainly face pushback from companies and trade groups seeking to dilute regulatory action. While many large European and U.S.-based multinational companies—including Unilever, IKEA, Volkswagen, H&M, Salesforce and Amazon—have endorsed the CSDDD framework in theory, their support is likely to wane as some governments adopt enforcement systems that penalizes corporate noncompliance.

Governments will face three major challenges in building a system that holds companies accountable for their environmental and social performance. First, they will need to define the term “due diligence” more clearly to ensure that the most serious problems are identified and effectively addressed. Typically, due diligence is an internal management tool, used by companies to scrutinize potential investments. In this context, companies will be expected to undertake due diligence to identify problems that will require time and money to fix. This will incentivize companies to under-report human rights and environmental risks.

Second, many companies will assert that they are responding to the challenges by strengthening internal sustainability processes and procedures. While potentially useful, improved processes don’t necessarily translate into improved performance. In 2021, the EU adopted the Corporate Sustainability Reporting Directive (CSRD) and the related European Sustainability Reporting Standards (ESRS). The CSRD is a disclosure directive; the ESRS outlines areas for these disclosures. The CSRD does not compel companies to take remedial actions. It also does not include substantive performance standards and metrics by which governments will be able to assess corporate compliance, standards which will differ for each industry.

Finally, governments will need to develop systems to gather and assess more and better data that tests company performance, including throughout their global supply chains. This data will document items such as whether health and safety standards have been met, hours of work and compensation for overtime provided, and prohibitions against child and forced labor are being enforced in practice. This will be a daunting task, but it will be essential to the success of the CSDDD system and to holding non-compliant companies accountable.