What does the CSDD directive mean?
The CSDD Directive goes further than the CSRD Directive and requires an active effort by large companies to prevent negative impacts on people and the environment from their own business activities, their subsidiaries and their supply chain partners (such as producers and suppliers). Not only large companies will be subject to these obligations; smaller companies that are part of the value chain of the large companies will be as well. Among themselves, companies will have to make agreements about this. What will these look like? To answer that question, we will first zoom in on the obligations imposed by the CSDD Directive.
What obligations does the CSDD directive contain?
The CSDD directive requires large corporations to exercise due diligence. Part of due diligence is that large companies are expected to identify, monitor and prevent, as far as possible, the impact of its own business activities and also those of its subsidiaries and supply chain partners. This requires adjustments at strategic and policy levels, such as in the areas of production, procurement, sales and distribution of goods. To pass on the obligation of due diligence to chain partners, large companies can draw up codes of conduct and action plans. The measures and their effect should be evaluated periodically. Furthermore, complaint procedures should be established so that stakeholders can sound the alarm whenever a company violates its obligations under the CSDD Directive. In addition, national authorities are given the power to take enforcement action by, for example, ending violations, imposing remedial measures or handing out fines.
To whom do the obligations apply?
The obligations of the CSDD Directive apply in particular to large companies with more than 1,000 employees and a worldwide turnover of more than EUR 450 million in the last financial year for which financial statements have been (or should have been) adopted. This is a select group of companies, but indirectly companies of smaller size also face the obligations of the CSDD Directive. After all, large companies must ensure that their chain partners also conform to the appropriate due diligence requirements. If the smaller companies fail to do so, the large companies may even have to sever ties with this smaller company. This means that the even the smaller companies, albeit indirectly through the large companies, must limit as many adverse effects on people and the environment as possible. It is expected that sustainability legislation will continue to expand, so that more and more companies will have to deal with it.
Impact on commercial contracts
The European Commission is expected to make model contracts available no later than 30 months after the CSDD directive enters into force so that companies can fulfill their due diligence obligation. For now, the model contracts are not there yet. When the CSDD Directive comes into force, we expect the following changes in commercial contracts, such as general terms and conditions or distribution agreements:
- A duty of disclosure for the contracting party, which requires the contracting party to be transparent and provide insight into the negative impact of its business activities on people and the environment;
- A review requirement through an annual consultation where contracting parties must evaluate the policies and measures taken to prevent adverse impacts on people and the environment;
- A guarantee stipulating that the contracting party conforms to the action plans and codes of conduct established under ESG obligations;
- A penalty clause as a sanction in case the contracting party breaches the aforementioned guarantees;
- A ban on subcontractors that prohibits the contracting party from using subcontractors to outsource services, thus limiting the number of chain partners in the value chain.
Take your chance, but beware of "greenwashing"!
Besides the fact that companies will soon be required by law to commit to ESG obligations, it can also be interesting from a commercial point of view to anticipate this development. By communicating to the outside world that a company is committed to ESG, a company can distinguish itself from its competitors and thus attract investors and financiers.
At the same time, the danger of "greenwashing" lurks. These are companies pretending to be more sustainable than they actually are by, for example, omitting information, making misleading promises, exaggerating or spreading untruths. This is by no means always done intentionally, but intention or not: greenwashing is prohibited and can be sanctioned by the Consumer & Market Authority (ACM) or the courts. Albert Heijn recently received a slap on the wrist from the ACM. Albert Heijn claimed to be the 'most sustainable supermarket', but could not sufficiently substantiate this claim and was therefore no longer allowed to make the claim. In addition, the court ruled that KLM had acted unlawfully by misleading consumers with advertising that was too 'green' about flying and the climate.
