The EU has paved the way for a new chapter on corporate accountability globally. On May 24, 2024, it adopted the EU Corporate Sustainability Due Diligence Directive (CSDDD) making it official law that all EU member states have to incorporate into national legislation.
This question-and-answer document addresses what the new law requires corporations to do to protect people in their value chains around the world, its strengths and weaknesses, and the opportunities for people in value chains and organizations representing them to protect their rights.
1. What is the Corporate Sustainability Due Diligence Directive?
2. What are the most serious weaknesses of the new law?
3. How will small and medium enterprises be affected?
In the globalized world we live in, our everyday lives depend on products and services of companies, including those based in the EU, that often rely on global “supply chains” to deliver these products and services. The EU is also one of the largest markets where foreign companies can sell their products and services to consumers. Millions of workers power these global value chains, and the operations of these companies affect the lives and rights of billions of people.
Behind many products or services is a complex network of business relationships, and some of these business activities harm communities, workers, and the environment. For example, the cars people drive may have bauxite mined in Guinea, where it causes water scarcity, and then processed into aluminum in Xinjiang in China, where Uyghur or other Turkic minority Muslims are victims of forced labor and other abuse. The gold jewelry one buys at a store in Europe may be mined in Ghana with hazardous child labor. The palm oil in body lotion may come from plantations in Indonesia, where companies operating them evict Indigenous Peoples and deprive them of their customary land rights. The clothes or footwear Europeans purchase may be made in Bangladesh, where workers experience abusive and dangerous working conditions. Companies may sell through large e-retailers like Amazon, that also operate massive logistics facilities where working conditions are extremely difficult, to store and deliver products to people’s doorstep.
Since voluntary standards requiring companies to respect human rights, labor rights, and environmental standards in their conduct and their value chains have proved inefficient, there has been growing momentum to introduce legally binding regulations on companies. Such laws now move beyond voluntary standards like the OECD Guidelines on Multinational Enterprises (1978) and the UN Guiding Principles on Business and Human Rights (2011), as well as voluntary industry initiatives such as certification schemes.
Over the last few years, several countries in Europe have introduced value chain due diligence laws, with legal obligations for corporations to identify, prevent, mitigate, and remediate human rights, labor rights, and environmental risks in their own operations and in operations with business partners in their value chains. The French Duty of Vigilance Law, the German Supply Chain Due Diligence Law, and the Norwegian Transparency Law are among such laws. Other efforts in countries like the Netherlands, Belgium, and Austria, are underway.
Efforts to introduce an EU-wide due diligence law that applies to corporations and their global value chains have been underway since 2020. These efforts have resulted in the adoption of this new law, which applies to large companies in their own operations and throughout their value chains. This law requires all EU member states, including countries like France and Germany, to introduce or update national laws to comply with its requirements.
What are some of the key strengths of the new corporate due diligence law?
The new due diligence law has many positive features. Some of its key strengths are:
- Sets an EU-wide standard on corporate due diligence that all EU member states should incorporate and enforce through their national legal systems.
- Requires companies to conduct due diligence on a wide range of human rights, labor rights, and environmental standards, which are detailed in the Annexes to the legislation. The list can be reviewed and updated or expanded as needed in a few years.
- Obliges companies to meaningfully engage with stakeholders – that is, the people affected – while conducting due diligence. Among the stakeholders are workers, Indigenous Peoples, farmers, local communities, and others potentially affected by a company’s operations, as well as trade unions and other organizations representing them.
- Requires companies to take a range of measures to prevent and mitigate risks, including changing their purchasing practices. This could help bring pressure on companies to adopt fair business models and to support their business partners to also adhere to human rights, labor rights, and environmental standards.
- Promises regulatory oversight, giving the authority to regulators in EU member states to scrutinize the due diligence practices of companies. If companies are found to fail to meet their due diligence obligations, regulators can impose maximum penalties of 5 percent of the net worldwide annual turnover of the company.
- Introduces a private right of civil action for victims of corporate abuses to sue companies in national courts of EU member states, bringing civil claims in cases where a company intentionally or negligently fails to comply with its legal obligations to prevent potential adverse impacts and to bring these adverse impacts to an end, and where that failure results in causing “a damage to the natural or legal person’s legal interest protected under national law.”
- Requires EU member states to ensure that the rules governing civil actions are not unduly burdensome to victims of corporate abuses when it comes to limitation periods, costs of such proceedings, and victims seeking injunctions to halt a harmful practice. Victims of corporate abuses can bring legal action through trade unions and other civil society organizations based in EU member states, in accordance with legal rules introduced by EU member states around such representation.
- Requires access to information through a European Single Access Point from January 1, 2029, where all public statements made by companies will be accessible through an online database maintained by the European Commission.
- Provides for sector-specific guidance by the European Commission to make sure that various types of business sectors are carrying out these requirements in the best possible way.
While the Corporate Sustainability Due Diligence Directive is groundbreaking in many ways, it also has significant drawbacks and falls far short of the recommendations made by many civil society organizations, including Human Rights Watch, the European Coalition of Corporate Justice, the Clean Clothes Campaign, the European Centre for Constitutional and Human Rights, trade unions from producer countries, and others.
The Council of the European Union, composed of EU member states, played a damaging role, introducing many caveats and exclusions whose impacts will become known only as the law is tested as it is carried out and enforced. The most egregious loopholes are:
- Excludes 99 percent of EU-based companies, with no statutory obligations for small and medium enterprises. The directive applies to a small subset of large companies that have more than 1,000 employees on average and more than €450 million in annual turnover. The scope of the directive was substantially whittled down through various phases of negotiations by the EU Council with drastic last-minute changes because of the obstructive roles of the French, German, and Italian governments. The Centre for Research on Multinational Corporations (Stichting Onderzoek Multinationale Ondernemingen, SOMO), a nongovernmental organization, published a preliminary estimate that only about 5,400 corporations would be covered under this directive. According to the European Centre for Corporate Justice, an alliance of over 480 nongovernmental organizations, these represent about 0.05 percent of EU companies.
- Includes an overly narrow definition of a company’s value chain and makes several exceptions, excluding many parts defined as “downstream”. For example, the law does not explicitly cover the sale of repressive surveillance and facial recognition technologies, the export of banned agrochemicals from the EU to other countries, and waste disposal.
- Largely excludes the financial sector, a major gap given that financial institutions, through their lending and other financial operations, may enable human rights abuses and environmental harm. Financial institutions are also major enablers of the polluting industries that drive the climate crisis.
- Excludes due diligence obligations related to climate change. The law limits due diligence obligations to core human rights and environmental due diligence, and excludes liability for companies’ conduct in relation to climate change. Instead, it requires companies to draw up a transition plan for climate change mitigation, without any sanctions if they don’t meet emission reduction targets.
Small and medium enterprises do not have any legal obligations under the directive and cannot face any regulatory action or penalties, but may be affected indirectly. The main impact is that the small and medium enterprises in the value chains of large companies are required, through contractual assurances, to bear the burden of due diligence efforts. The law obligates companies seeking contractual assurances to create fair contracts with these small or medium companies and to assess what appropriate measures, including capacity building – and potential financial support – they should provide to support these operations.
Member states can institute a range of other supporting measures to small and medium businesses, including for financial support. The European Commission is also periodically expected to assess the impact of the directive on these businesses and bring that to the attention of the European Parliament and the Council of the EU.
The law will take effect in stages. Overall, there is a three-to-five-year waiting period before the law can be enforced and companies have to file disclosures.
After the law officially enters into force – 20 days after its publication in the Official Journal of the EU, so around mid-June 2024 – all EU member states will have two years to introduce new laws or adapt existing ones, and to set up other administrative provisions necessary to comply with the directive.
The implementation, and with it the possibility to bring up actual complaints against companies covered under the directive, will be staggered based on a company’s size. From its entry into force, companies will have to comply with the directive:
- After three years, if companies have more than 5,000 employees and a turnover of €1,500 million;
- After four years, if companies have more than 3,000 employees and a turnover of €900 million
- After five years, if companies with more than 1,000 employees and €450 million turnover.
As a result, victims of corporate abuses cannot immediately initiate legal action. Some of the legal obligations outlined in the directive also require further guidance, which the European Commission should issue three years after the directive enters into force, along with the beginning of its actual implementation.
The European Commission is tasked with issuing guidance on various topics, including stakeholder consultation, purchasing practices, and model contract clauses. Trade unions and other civil society organizations can and should influence the development of such guidance based on their experience, and other research and publications.
Companies should consult and meaningfully engage trade unions and other civil society organizations as key stakeholders as part of their due diligence obligations. Trade unions and other civil society organizations will also have an important role to play when it comes to monitoring human rights and environmental impacts in global value chains that are covered by the law to initiate cases when necessary.
Finally, trade unions and other civil society organizations should monitor the implementation and enforcement of the law to support the upcoming review process.
Over the next few years, as victims of corporate abuses wait for guidance and for member states to incorporate the directive into their national legal frameworks, companies will be preparing to bolster their human rights and environmental due diligence approaches and methods. This will be an important window of opportunity for donors, including development aid organizations, to support and actively participate in the development of new monitoring tools to measure the effect of these practices and methods on workers and the various communities affected. For example, this could include benefit-sharing agreements with communities affected by mining or forest-conservation; initiatives to expand wage transparency for workers; and binding agreements with companies to make certain that their results are periodically transparently reported.
In the past, audit firms and certification bodies have largely operated without regulatory or judicial scrutiny. The EU directive changes that since regulators and courts will be able to examine companies’ use of audits and certifications.
The directive states that companies should assess the “appropriateness” of audits, certifications, multi-stakeholder or other industry initiatives as part of their due diligence and use those that it considers appropriate to the goals and obligations set out in the directive. Regardless of the appropriateness of an initiative, companies cannot shield themselves from liability or regulatory action by using such initiatives. The European Commission has been tasked with issuing “fitness criteria and a methodology for companies to assess the fitness of industry schemes and multi-stakeholder initiatives.”
Human Rights Watch has repeatedly outlined the risks and harm from relying on social audits and certifications. They are not reliable tools to detect and remedy complex problems like forced labor, child labor, harassment and discrimination, and freedom of association violations. Audit reports are often superficial, and sometimes recycle stock language. Opaque audits are hugely problematic and create fertile ground for audit malpractices to thrive undetected.
Transparency of audits and certifications would go a long way in shining a light on a due diligence tool that companies use widely. However, better audits or more transparent audit reports should not be conflated with robust due diligence. Audits or certifications can at best be one source of information, and companies using audits and certifications should be prepared to demonstrate that their due diligence is ongoing and does not depend on dated audit information.