The 2024 EU Corporate Sustainability Due Diligence Directive (CSDDD) presents a seachange for international business relations and sustainable global supply chain practices for green growth. The CSDDD aims for accountability in supply chain violations of the environment, society, and human rights. However, its implementation poses certain risks to economic growth, corporations, and their investors, particularly for those operating outside the EU.
The new Directive will enforce the identification of businesses’ impacts to human rights and environmental concerns across their operations, partnerships, suppliers, and value chains, along with their actions toward responsible corporate behaviour. By implementing its mandates, corporations are empowered to orient towards progressive sustainability goals as it requires them to transition towards both the intermediary targets set by the European Climate Law and ultimately the Paris Agreement’s 2050 neutrality objectives.
The active administrative- and self-supervision of business’ impact on human rights and the environment, on both national and transnational scales, is how the Directive can both enforce and encourage its sustainability principles. Currently, the adoption of a harmonised and truly progressive set of practices across the continent stagnates because each individual set of national rules on corporate due diligence vary in their extent and success. This shift is long overdue as global supply chains are increasingly serpentine and data on their particular operations is opaque and inaccessible to publics and governments alike.
As a result, a key objective is a systematic legal framework of sustainability within the EU. As uniformity allows for equal opportunity within the market, the Directive institutionalised legal certainty for businesses on top of sustainable due diligence. It also encourages competition in the race to the top of sustainable practices, engendering an environment where responsibility and accountability become core components of business strategy.
This shift poses several avenues for growth for private companies such as reduced civil liability for breaches of human rights and social and environmental policy, increased consumer trust through more responsible conduct, and greater productivity within their operations. By adopting the mandated measures, companies will be better prepared to face rapidly changing economies through enhanced capacity for innovation and risk management. Moreover, companies that institute sustainable practices are more likely to attract investment, talent, and public procurement.
Additionally, the Directive stimulates sustainable investment in developing areas, encourages adherence to international standards, and increases efforts to build value chain capacities. Consequently, the development of regional living standards, human rights, and the environment is to be expected with the Directive’s implementation.
However, the execution of its initiatives carries its own set of challenges. President of UNIDROIT Maria Chiara Malaguti, a renowned and highly-regarded academic with extensive experience in international law, shares her valuable insights. She highlights the complexities of mandating sustainability. “Mandatory sustainability can have pros and cons. Although we have guidelines to obligate due diligence, there is a certain extent of flexibility in how businesses choose to set their initiatives,” Maria Chiara explains, as flexibility is essential for businesses to remain competitive and continue to grow. “Flexibility allows sustainability to be achieved without imposing an unrealistic burden, enables businesses to negotiate initiatives at their own pace, and it keeps companies operational on an everyday basis.”
This flexibility and freedom to negotiate allows the distribution of sustainability principles across the economic landscape. Sustainable business models and contracts encourage company stakeholders to gradually adopt standards of sustainability at larger scales. A flexible approach enables businesses to educate their partners, especially where there is a lack of state enforcement of adequate sustainability initiatives.
International companies looking to make investments outside of the EU must observe further commitments to sustainability outside of the aforementioned face-to-face sustainability initiatives. This is because investors face increasing pressure to ensure their compliance to sustainability initiatives, especially in resource- and labor-intensive industries such as energy and infrastructure, whose environmental and social impacts are historically significant. “If an EU-based energy corporation would like to build a plant outside of the EU, they are obligated to engage in dialogue with local communities and conduct environmental impact analyses. This will affect companies’ fundamental investment strategies, from responsibilities to their project timelines,” explains Maria Chiara.
The CSDDD also shifts accountability models within industry. In addition to financial stakeholders, corporations must now respect the needs of third-party stakeholders like local communities and environmental groups that are invested in the impact of economic activity on their society and the surrounding environment. This mandate expands businesses’ traditional sources of legal liability, as observed in class-action lawsuits brought by NGOs, affected communities, and individuals against the harmful operations of fossil fuel corporations.
The Directive is an important step forward for the EU’s sustainability program, but it may falter in its place within the wider global economy. Maria Chiara remarks, “As the bar for sustainability is raised, production becomes more expensive. Other countries may mandate fewer and more lenient regulations on their firms, and this means that companies in the EU will face relatively high production costs. This may put EU-based companies at a competitive disadvantage.” If its rules are too stringent, it may hinder economic growth and competitiveness, especially for companies with fewer resources to adhere to them. This potential inequality highlights the need for a more nuanced approach to implementing sustainability due diligence, one that takes into account both the necessary flexibility and growing progress in the sustainability sector.
The Directive has the capacity to overhaul current approaches to developing sustainability models, especially in the integration of championing human rights, and the consideration of social and environmental determinants in the operations of private companies. The Directive exemplifies this transformation in its due diligence mandate for ‘sustainability balance sheets’ in addition to financial sheets. Due to this material objective for increased transparency and accountability, companies are obligated to change their business behaviours, from the suppliers they choose to engage with down to their risk assessments. This is because, through this process of recording their sustainability activities, firms may discover that they engage with suppliers that no longer meet the EU’s standards and entirely reorganise their value chains.
While its implementation posits certain complexities for businesses and their investors around the globe, the CSDDD represents a vital move toward a more responsible, sustainable global economy. According to Maria Chiara, “The CSDDD’s effectiveness pivots on its ability to juggle flexibility and sustainability. Regardless, corporations that champion sustainability as the inevitable core of their operations will see the fruits of a progressive and competitive economy.”
