The recently adopted EU Corporate Sustainability Due Diligence Directive (CSDDD) marks a transformative chapter in the way businesses operate across borders, placing greater emphasis on sustainable practices in global supply chains. As the world confronts pressing environmental and social challenges, this directive aims to hold corporations accountable for their impact on human rights and the environment, particularly within their extended value chains. However, while the intent of the directive is clear, its implementation presents significant complexities for both companies and investors, especially those outside the EU. Maria Chiara Malaguti, President of UNIDROIT, and a well-known, highly-regarded academic, with wide experience in the fields of unification and harmonisation of international law, shares her insights on this.
The EU CSDDD seeks to ensure that companies identify and address potential adverse human rights, social, and environmental impacts in their own operations, subsidiaries, and throughout their supply chains. It aligns corporate behavior with sustainability goals, requiring companies to also adopt climate change mitigation strategies that correspond with the Paris Agreement’s 2050 climate neutrality objectives.
The directive mandates a form of corporate due diligence, where businesses must actively monitor their impact on human rights, society, and environment, both domestically and globally. This shift is critical as global supply chains have become more complex, and information about the operations of business partners is not always readily available. Moreover, the fragmented nature of national rules on corporate due diligence has slowed progress in adopting uniform sustainability practices across Europe.
One of the central goals of the CSDDD is to establish a harmonised legal framework across the EU. This uniformity is expected to create a level playing field for businesses operating within the single market, offering legal certainty while simultaneously encouraging responsible business conduct. The directive encourages competitiveness, ensuring that sustainability becomes the core component of business strategy.
For companies, this shift promises several advantages, such as increased customer trust, greater employee engagement, and reduced liability risks associated with human rights, social, and environmental breaches. By adopting sustainability measures, companies are better equipped to manage risks, enhance resilience, and boost innovation. Furthermore, firms that integrate sustainability into their operations are likely to attract talent, investors, and public procurement opportunities, which are increasingly oriented toward sustainability criteria.
Developing countries, in particular, stand to benefit from this directive. The CSDDD encourages sustainable investment in developing regions, enhances capacity-building efforts for value chain companies, and promotes adherence to international standards. As a result, the directive is expected to improve the living conditions of communities in these regions, while also protecting human rights, society and the environment.
Despite the clear benefits of the CSDDD, its implementation has its own challenges. Maria Chiara spotlights the intricacies involved in making sustainability mandatory. She notes that while the directive makes due diligence obligatory, at the international level there is more flexibility in how businesses achieve their sustainability goals. This flexibility is essential for companies to operate economically and remain competitive.
Having sustainability be mandatory might have pros and cons. At the international level, while we have guidelines set in place for due diligence, there is flexibility in how companies choose to achieve their targets. This allows for sustainability to be implemented in a way that is operational on a daily basis, without imposing unrealistic burdens, Maria Chiara explains.
She harps on this flexibility that enables businesses to negotiate and implement sustainability principles at their own pace, often through contracts and business models that encourage stakeholders to gradually adopt the same standards. This approach allows companies to educate suppliers and partners, particularly in countries where local governments may lack the capacity or willingness to enforce high sustainability standards.
Irrespective, at the international level companies that look to make foreign investments need to comply with some commitments on sustainability. Investors, are facing increasing pressure from stakeholders to ensure compliance with sustainability requirements. This forces them to re-evaluate how they approach potential investments, particularly in industries like energy or infrastructure, where environmental and social impacts can be significant.
This vanguard explains, “For instance, if an energy company plans to build a plant in Africa, they must engage with local communities and conduct environmental due diligence, even if they are an EU-based company. This changes the timing, commitments, and types of activities involved in their business model, ultimately affecting their investment strategy.”
The directive also introduces a shift in accountability. Companies now need to consider their immediate stakeholders as well as third-party stakeholders, such as local communities and environmental groups. This shift increases the risk of legal claims from non-traditional actors, as seen in cases brought against oil and gas companies by non-governmental organizations and class-action lawsuits from affected communities.
While the directive aims to fit into sustainability practices within the EU, it raises questions about global competitiveness. Maria Chiara points out that companies in the EU may face higher production costs due to the stringent sustainability requirements, potentially putting them at a disadvantage when competing with firms from countries with less stringent regulations.
The higher the standards, the more costly it becomes to produce. European companies may find themselves at a competitive disadvantage compared to companies from other regions where there are no such commitments, Maria Chiara notes.
This imbalance underscores the need for a nuanced approach to implementing mandatory due diligence, one that maintains flexibility for companies while still pushing them toward meaningful sustainability outcomes. If the directive is too rigid, it could hinder innovation and stifle competitiveness, particularly for smaller companies that may struggle to meet the new requirements.
The CSDDD is poised to transform how businesses approach sustainability, particularly in terms of how they integrate human rights, societal, and environmental considerations into their business models. Maria Chiara highlights that companies will need to develop new balance sheets that account for their sustainability impacts, in addition to their traditional financial statements. “The directive requires companies to produce sustainability balance sheets alongside their economic ones. This changes everything, from the types of suppliers companies can engage with to the way they assess risks and make profits, she explains.
Moreover, companies may find that they are no longer able to work with certain suppliers who cannot meet the new sustainability standards. This will likely lead to a reconfiguration of supply chains, with companies prioritizing partnerships that align with their sustainability goals.
The EU Corporate Sustainability Due Diligence Directive does represent a critical step toward creating a more sustainable and responsible global economy. However, its implementation presents significant challenges for businesses and investors alike, both inside and outside the EU. As Maria Chiara Malaguti zooms in, the directive’s success will depend on its ability to balance mandatory requirements with the flexibility needed for businesses to adapt and innovate. And, those who embrace sustainability as a core component of their operations, will be better positioned to thrive in a progressive competitive, and conscientious marketplace.
