eu due diligence

Upcoming vote in the EU on corporate due diligence

By: Radu Mares,

The Council of the EU will vote on the Corporate Sustainability Due Diligence (CSDDD) on Friday, 9th of February, a date that will be remembered, one way or another, as an inflection point for corporate sustainability. Some EU governments are having second thoughts about the political agreement reached in December 2023.

The CSDDD makes corporate human rights and environmental due diligence mandatory and subject to legal sanctions. It is thus a tool to reduce corporate impunity and facilitate reparations for victims.

The CSDDD carries business benefits too. A significant number of companies recognized the merits of an EU law on due diligence in terms of legal certainty, predictability and leveling the playing field.

Still there is more to CSDDD than all the above. It plays a unique role in the green transition and rebuilding economies on sustainable basis. As the Preamble of CSDDD makes clear, this Directive is not meant to operate in isolation, but complements and interacts with many other EU laws already adopted. First, it complements other sectoral due diligence laws (on conflict minerals, deforestation, batteries). Second, it relates to corporate reporting laws such as the Corporate Sustainability Reporting Directive (CSRD) and the European sustainability reporting standards (ESRS). Third, it is relevant to financial reporting regulations such as the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy. Fourth, it complements EU free trade agreements that include sustainability provisions and thus bear on the governance of global value chains.

Seen in this policy context, CSDDD is a facilitator: it provides markets with standards and data. That is standards on expected corporate performance, and meaningful data that is usable for financial decisions. Such ESG information enables investors and financial intermediaries to factor in sustainability in their work. For the green transition, sustainable (private) finance is important, or indispensable, to amass the trillions needed. Without the CSDDD, a cog is removed from the regulatory and market architecture that is needed to build sustainable economies.

The CSDDD is a source of innovation on several levels. There is regulatory innovation as the EU has built the ‘smart mix’ of measures, which is unprecedented globally and an experiment with a more sustainable economy. There is innovation in business as there are new incentives to create business models attuned to the green and just transition. There is innovation in terms of implementation and new collaborations occasioned by this comprehensive mix of policies and market measures. Finally, there is innovation in terms of digital tools to manage sustainability impacts as there is an increased demand for big data and machine learning applications for due diligence.

CSDDD clarifies what responsible business conduct is as a legal obligation, creates opportunities and facilitates innovation, and contributes in unique ways to a just, digital and competitive transition.

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