The European Parliament and the European Council agreed on the Corporate Sustainability Due Diligence Directive (CSDDD) on December 14, 2023. In Dutch, this is the directive appropriate due diligence in corporate sustainability.
The purpose of this CSDD directive is to better protect the environment and human rights both in the EU and around the world. The directive will apply to companies with more than 500 employees and 150 Mio turnover worldwide. But because the rules apply to the entire chain of these companies, i.e. both their supply chain and their sales channels, they will indirectly apply to SMEs as well.
Key elements CSDDD
The directive, as already mentioned, will apply to companies with more than 500 employees worldwide and a net turnover of more than 150 million Euros. Non-EU companies that also make a net turnover of more than 150 million in the EU 3 years after the directive comes into force will also be covered. Those companies will be published in a European Commission list. In this way, the EU is going to try to get foreign companies covered by the directive as well.
Under the directive, stricter requirements are placed on the efforts that these large companies must make to adopt more sustainable business practices and respect human rights. Among other things, this means that in their supply chain, they must also impose those duties on their suppliers and business partners. If nothing changes in the worst case scenario, the relationship with that business partner will have to be terminated.
If companies do not comply with the requirements of the directive, injured parties can go to court. That means, for example, trade unions but also environmental organizations such as Greenpeace if they find violations. Fines can also be imposed.
Impact CSDDD on SMEs
So although SMEs will not be directly affected by the CSDDD, they are indirectly affected, for example because they supply goods to a company covered by it or because they purchase goods from them. In more and more general terms and conditions of large companies you see extensive warranty clauses popping up that include that the supplier meets all ESG requirements and what the consequences are if this is not the case.
So an SME entrepreneur has to start declaring that his own chain is CSDDD proof against a company subject to the CSDDD (or German Liefferkettengesetz). That means that he must in turn pass on all those obligations imposed on him by these companies to his own supplier. So if you source components from low-wage countries, for example, you have to start thinking carefully about how you find out how working conditions, workers' rights and the environment are handled in those companies. Not an easy job!
SMEs in the automotive industry are already accustomed to extensive audits and reporting requirements that they must comply with. It is expected that monitoring of ESG obligations at these companies will also take place through audit systems.
Procurement Law
The directive is going to stipulate that public tenders can only be awarded if the new directive is met, so if you regularly compete in tenders, from the introduction of the CSDD, new elements will be added to it that you will also have to meet if you want to remain a contender.
How can LAW FIRM help you?
As an SME entrepreneur, do you need help becoming compliant or are you already dealing with buyers who impose far-reaching ESG obligations and want to know how to deal with them?
We can help you with:
- Screening risk factors in your supply chain
- Drafting contract provisions for suppliers
- Assistance in completing and reviewing imposed ESG provisions and audits of buyers
Contact Esther Tromp (E: esthertromp@law-firm.international, T: +31655742167) for a customized consultation.