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While drastically reduced from its first proposal, the directive introduces significant obligations for large companies regarding the adverse impacts of their activities on human rights and environmental protection.
Compared to earlier versions which had a much broader scope, the CSDDD only applies to large EU companies and non-EU companies that meet specific employee and turnover thresholds worldwide or within the EU market.
The CSDDD introduces human rights and environmental “due diligence obligations” at the level of the company’s operations, its subsidiaries’ operations, and both their upstream and downstream business partners in their “chain of activities.” To clarify, upstream starts at the extraction of raw materials and involves the production of goods or the provisions of services, whereas downstream includes distribution, transport and storage of the products.
Companies affected by the legislation will have to take and implement a risk-based strategy to monitor, prevent or remedy human rights or environmental damages identified by the directive.
The central component of the CSDDD is the five due diligence obligations that companies, their subsidiaries, and business partners must carry out as follows:
The CSDDD will formally enter into force 20 days after its publication in the Official Journal of the European Union. Member states will then have two years to transpose the new rules into their national laws.
However, EU companies and companies with a nexus to the EU market should not wait to assess the current state of their human rights and environmental due diligence policies and risk management procedures to identify where improvements may need to be made, including contracts with business partners.
Companies must integrate enhanced due diligence processes into their operations. To prepare and adapt to these requirements companies should begin with a thorough review of their current practices and supply chains, engaging with stakeholders and developing robust compliance frameworks. Support from external advisors like The Risk Advisory Group will be crucial in navigating these requirements, having the capability to respond swiftly and appropriately to any identified human and environmental harm.
To discuss this article or any other business challenge in risk and compliance, ESG, supply chain due diligence, or disputes and investigations, please get in touch with one of our experts at info@riskadvisory.com
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