Understanding the Corporate Sustainability Due Diligence Directive (CSDDD) and Its Impact on Indian Businesses
The Corporate Sustainability Due Diligence Directive (CSDDD)is a landmark regulation adopted by the European Union on 24th April 2024, aimed at ensuring that businesses take responsibility for the human rights and environmental impacts of their operations. The regulations had been in the works for some time now and even before that there were country level due diligence policies in countries like Germany and France.
With this new regulation, the EU looks to build a level playing field and hold businesses with significant operations in the EU accountable for their impact on the environment.
With its adoption, companies must integrate due diligence into their policies, identify and address adverse impacts, and ensure compliance across their global value chains, including their business partners.
Who is under the purview of CSDDD?
The directive applies to large corporations operating in the EU with 1000+ employees. Businesses or SME’s with over 450 million euro’s turnover are also covered in this. While the directive is not directly applicable to businesses outside the EU, there will be an indirect impact as global businesses that are contractors or suppliers to such large EU businesses. These suppliers or vendors will have to bring in transparency and reporting in their operations to help their clients fulfill the requirements of CSDDD.
Impact on Supply Chains
The CSDDD's broad scope covers not just the internal operations of companies but also their entire value chain, which includes suppliers and business partners. This means that companies must scrutinise their supply chains to ensure that their partners comply with the directive’s standards. This is particularly significant for Indian businesses that are part of EU companies' supply chains.
For Indian businesses, the directive implies a rigorous review of their practices concerning labour rights, environmental standards, and overall corporate governance. Companies will need to ensure that their operations and those of their suppliers adhere to the stringent requirements set by the CSDDD. Failure to comply could result in significant penalties, including fines and potential loss of business with EU partners.
Enhanced Scrutiny
Indian businesses will undergo stricter audits, face higher demands for transparency, and risk contract terminations if they don't comply.
Increased Costs
Businesses may incur additional expenses for implementing due diligence processes, making operational changes, and building capacity. This may lead to increased costs.
Potential Legal Liability
Non-compliance with CSDDD can lead to significant legal risks, including fines and reputational damage, highlighting the importance of adhering to the directive and taking proactive compliance measures.
Compliance Requirements
To comply with the CSDDD, Indian businesses engaged with EU companies need to take the following steps:
The Corporate Sustainability Due Diligence Directive (CSDDD) places rigorous requirements on supply chain providers and freight forwarders delivering goods to the EU. This directive aims to ensure that companies actively manage and mitigate adverse human rights and environmental impacts across their entire value chain, including both upstream and downstream activities.
Key Requirements for Compliance:
Comprehensive Due Diligence
Companies must conduct thorough risk-based due diligence to identify, prevent, mitigate, and account for potential and actual negative impacts on human rights and the environment. This due diligence should cover the company's own operations, subsidiaries, and both direct and indirect business partners involved in the supply chain, extending to both upstream and downstream operations.
Climate Change Mitigation Plans
Businesses are required to adopt and implement transition plans to align their operations with the goals of the Paris Agreement, specifically limiting global warming to1.5 degrees Celsius. This includes setting specific, time-bound targets and strategies for reducing greenhouse gas emissions.
Stakeholder Engagement
Companies must engage meaningfully with stakeholders, which include employees, trade unions, local communities, and civil society organizations, throughout the due diligence process to ensure transparency and accountability in addressing sustainability issues.
Reporting and Transparency
Regular monitoring and public reporting on the effectiveness of due diligence measures are mandated. Companies must disclose their efforts to address human rights and environmental impacts.
Establishing Complaint Mechanisms
Businesses must set up effective grievance mechanisms to allow stakeholders to report any human rights or environmental violations. This system should be accessible to all stakeholders in the supply chain and ensure timely and adequate responses to complaints
Penalties for Non-Compliance
The directive includes provisions for significant penalties, including fines up to 5% of global net turnover, for companies that fail to meet their due diligence obligations. These penalties aim to enforce compliance and ensure that companies take their responsibilities seriously.
While the implementation of CSDDD’s first phase will begin from 2026, it is a good idea for businesses and supply chains in India with significant business in EU to start implementing this. Indian policymakers too are implementing stringent reporting and monitoring that focus on sustainability, hence it is a matter of time before such directives become a norm.
Key Benefits of Compliance for Indian businesses
Complying with the CSDDD not only ensures continued business with EU companies but also brings several benefits:
● Enhanced Reputation
Demonstrating a commitment to sustainability can enhance a company’s reputation and build trust with consumers and business partners.
● Reduced Risks
Proactive risk management can reduce the likelihood of legal issues and associated costs.
● Competitive Advantage
Companies that lead in sustainability practices may find it easier to attract investment and enter new markets.
● Operational Efficiency
Improved environmental and social practices can lead to more efficient and sustainable operations.
Conclusion
The CSDDD represents a significant shift towards more sustainable and responsible business practices. For Indian businesses, this directive is both a challenge and an opportunity. By adopting comprehensive due diligence processes and ensuring compliance, companies can not only secure their position in the global market but also contribute to a more sustainable future.