Daniel Debono, EU Affairs Manager and Head of Brussels Operations
This Opinion Piece featured on Malta Business Weekly, on 27 October 2022.
An overview of the EU proposal for a Corporate Sustainability Due Diligence Directive
Human rights protection and environment sustainability are two important values for the European Union. These are enshrined in the EU Charter of Fundamental Rights as well as the European Climate Law, which makes the EU’s commitment to the European Green Deal’s objectives of becoming climate neutral by 2050 legally binding. The EU also looks at exporting these values and commitments by setting the standards globally.
Earlier this year, the European Commission published a proposal for a Corporate Sustainability Due Diligence Directive (CSDDD). The Directive, which complements several other recent EU Directives such as the Corporate Sustainability Reporting Directive and the Taxonomy Regulation, looks at fostering sustainable and responsible corporate behaviour throughout global value chains.
The CSDDD will require target companies to incorporate policies and to undertake due diligence processes that identify, and where necessary, prevent, end, or mitigate adverse impact activities on human rights and the environment. It will apply to companies employing at least 500 employees and generating Eur150 million revenue globally. For companies that operate in sectors defined as high impact, which include agriculture, extraction of minerals, manufacturing of textiles, food and beverage, among others, the threshold will be that of employing at least 250 employees and generating Eur40 million revenue globally. The due diligence must cover the operations of target companies, their subsidiaries, and their whole global value chain. Failing to do so shall open the companies to the possibility of sanctions and will also risk civil liability.
From a Maltese perspective, only a few companies fit the thresholds to fall within the scope of the CSDDD directly. Nonetheless, this proposal is still relevant to Maltese companies of all sizes because as already stated, target companies must undergo due diligence on their global value chain to be compliant with the Directive, including on other large companies and SMEs. Given that any given product from source to retail may involve tens if not hundreds of producers and suppliers, Maltese SMEs will also become subject to due diligence requirements when carrying out business with any local or foreign company that is subject to the CSDDD, whether directly or indirectly. Mandatory due diligence screening will also be required to be undertaken by financial regulated entities prior to providing services to large companies.
Many businesses are of good will and aim to have a positive impact on society. They support EU efforts in mitigating adverse impacts on the environment and human rights. Nonetheless, the recent Covid-19 pandemic and subsequently the crisis resulting from the war in Ukraine has demonstrated the fragility of global value chains, and the vulnerability this creates among workers, communities, and businesses around the world. As we navigate through these crises and look forward to rebuilding a more resilient economy, one must not forget that the transition to a green economy and the responsibility to provide quality employment cannot be put on pause. In this respect, the CSDDD is timely.
Yet, several companies already take steps to implement due diligence processes in line with their corporate responsibility to respect human rights and the environment. Mandatory due diligence standards therefore can be beneficial if they can be reasonably implemented and if the legal framework is designed to incentivize positive impacts instead of a culture of punishment.
At the same time, one must also recognise that European businesses do not operate in vacuum and are very much interlinked in the global economy. From a Maltese perspective, businesses operate from a small open island economy on the periphery of the continent with some permanent disadvantages that magnify the challenges compared to the ones experienced by businesses on the mainland.
So, while reiterating the importance of lifting standards and adhering to sustainability and human rights obligations, there needs to be a balance between making the necessary reforms and safeguarding economic competitiveness, by shielding administrative and financial costs particularly for small and medium enterprises, and especially during the current economic climate.
For instance, to avoid the burden on SMEs that run the risk of being subject to multiple due diligence processes if they form part of two or more value chains of different target companies complying with the Directive, the responsibility could be placed on a central authority that carries out a standard due diligence process on companies and provides them with a certification which they may present to counterparties upon request.
As for the target companies, whose value chains run into multiple layers globally, it is not realistic to expect that these can have control and be held legally accountable for actions undertaken by companies at source, particularly if they are in remote third country jurisdictions. In this case, while companies should continue to be encouraged to take responsibility and support companies throughout the whole supply chain to meet due diligence standards, the liability to adverse impacts should only be limited to the first-tier level, where the target companies have direct control on the business relationships.
The rationale behind the CSDDD is good, but the real challenge is to pass a law that is fit for purpose. The EU legislators must therefore ensure that ambiguous legal obligations that cannot realistically be enforced are removed, and that the impact on SMEs within supply chains is not overlooked.