On April 24, 2024, the European Parliament officially approved the Corporate Sustainability Due Diligence Directive (CSDDD), marking the culmination of a four-year legislative process. This directive is a pivotal step aimed at mitigating the risk of negative impacts on human rights and the environment within global value chains by instituting new obligations for companies regarding their due diligence processes across their operations and value chains.
The CSDDD mandates that companies identify both potential and actual adverse impacts on human rights and the environment associated with their operations, subsidiaries, and business partners within their value chains. Upon identifying such impacts, companies are required to implement measures to prevent or mitigate potential impacts and address or minimise actual impacts. Given the extraterritorial reach of the new rules and the ongoing disruptions in supply chains, compliance is expected to pose significant challenges for companies falling under the scope of the CSDDD.
The CSDDD applies to both EU and non-EU companies that meet specific criteria. For EU companies, it initially targets those with a net worldwide turnover of more than €450 million ($416 million) and 1,000 employees. Additionally, companies with a turnover of €1.5 billion ($1.4 billion) and more than 5,000 employees are prioritized. For non-EU companies, those generating a net turnover of more than €450 million within the EU are included. In corporate groups, the directive applies to the ultimate parent company, or where the parent company is a holding company, each of the operational subsidiaries closest in the chain of control to the parent company, provided the group’s consolidated turnover in the EU is at least €450 million.
The CSDDD is set to come into force in 2028. However, due to a phased implementation approach, the law will only be fully in effect from 2023. The timeline for non-EU companies to comply varies based on their turnover in the EU. Companies with at least €1,500 million in the EU will have three years to implement CSDDD obligations from the first financial year beginning on or after January 1, 2028. Companies with at least €900 million in the EU will have four years to implement CSDDD obligations from the first financial year beginning on or after January 1, 2029. All other companies within the scope will have five years to implement CSDDD obligations from the first financial year beginning on or after January 1, 2029.
Organizations failing to prevent or mitigate potential and/or actual adverse impacts that result in damages will be liable for such damages. Affected persons can bring forward actions to claim compensation. Additionally, companies could face fines as steep as 5% of their turnover for breaching the rules. Termination of business relationships may also be required if necessary.
The enforcement of the CSDDD will involve administrative supervision and civil liability. Member States will designate authorities to supervise and impose effective, proportionate, and dissuasive sanctions, including fines and compliance orders. At the European level, the European Commission will establish a European Network of Supervisory Authorities to ensure a coordinated approach among national bodies. Member States will ensure that victims receive compensation for damages resulting from non-compliance with the directive’s obligations. Non-EU companies will be regulated by EU national authorities most closely connected with their branches of operation within the EU and/or where the majority of their turnover is generated.
The CSDDD will significantly impact Bangladeshi businesses, especially those that are part of the supply chains of European companies. As the directive aims to mitigate adverse impacts on human rights and the environment, it imposes rigorous due diligence requirements on businesses, including those outside the EU, that are connected to EU markets.
Many Bangladeshi businesses operate as suppliers to large European companies, particularly in the garment and textile sectors. Under the CSDDD, these European companies will need to ensure that their suppliers adhere to strict environmental and human rights standards. Consequently, Bangladeshi suppliers will face increased scrutiny and will need to demonstrate compliance with these standards. The directive necessitates that companies within the supply chain identify, prevent, mitigate, and account for adverse human rights and environmental impacts. This means Bangladeshi businesses must implement robust due diligence processes, which could involve significant changes to their operational practices, monitoring, and reporting mechanisms. Non-compliance with the CSDDD can lead to legal actions and financial penalties. European companies may terminate business relationships with non-compliant suppliers to avoid these risks, which can affect the financial stability of Bangladeshi businesses dependent on EU markets.
To prepare for these changes, Bangladeshi businesses should establish comprehensive due diligence frameworks that include risk assessments, regular audits, and monitoring of their supply chains. This involves identifying potential and actual adverse impacts on human rights and the environment and taking steps to address these issues proactively. Companies should enhance their compliance mechanisms by adopting international standards such as ISO 14001 for environmental management and SA8000 for social accountability. Regular reporting on sustainability practices and compliance status will be crucial to meet the transparency requirements of the CSDDD. Businesses should actively engage with stakeholders, including employees, suppliers, local communities, and NGOs, to understand their concerns and expectations. Effective stakeholder engagement can help businesses identify risks and develop mitigation strategies collaboratively.
Investing in training programs for employees on sustainability practices and human rights standards will be essential. Building internal capacity to handle due diligence processes and compliance reporting will ensure that businesses can meet the directive’s requirements efficiently. Forming alliances with industry peers and participating in collective initiatives can help businesses share best practices and resources. Industry associations and business networks can provide valuable support in navigating the complexities of the CSDDD. Utilizing technology for supply chain management, such as blockchain for traceability or digital platforms for monitoring compliance, can enhance transparency and efficiency. Technology can also aid in data collection and reporting, making it easier for businesses to meet regulatory requirements.
Bangladeshi businesses should communicate regularly with their European partners to understand their specific due diligence requirements and expectations. Collaborative efforts to align practices and standards will strengthen business relationships and ensure compliance with the directive. Consulting with legal and sustainability experts can provide businesses with tailored guidance on complying with the CSDDD. Experts can help identify gaps in current practices and recommend strategies for improvement.
The Corporate Sustainability Due Diligence Directive represents a significant shift in the regulatory landscape for global supply chains, with profound implications for Bangladeshi businesses. By proactively adopting robust due diligence processes, enhancing compliance mechanisms, and engaging with stakeholders, Bangladeshi businesses can not only ensure compliance with the CSDDD but also strengthen their market position and reputation in the global marketplace. Investing in sustainability and human rights practices will be key to navigating the challenges posed by the directive and leveraging new opportunities for growth and competitiveness.
