Corporate Sustainability Due Diligence Directive - Av. Prof. Dr. Gülsün Aygörmez

Researcher/Legal Intern Tuğçe Ay

The European Union (EU) is accelerating its efforts to ensure environmental and social sustainability through the development of a comprehensive regulatory framework. In its January 14, 2020 Statement titled “Strong Social Europe for Just Transition”, the European Commission committed to strengthening Europe’s social market economy for a just transition towards sustainability, ensuring no one is left behind. In addition to its commitment to social sustainability and human rights, The European Green Deal, adopted by the European Commission in 2019, demonstrates Europe’s sensitivity and care for environmental and social sustainability by providing a comprehensive roadmap based on the EU’s goal of becoming a carbon neutral continent and its sustainability approach. (2)

The European Union is taking many steps to promote sustainability in the corporate sense, to set standards for a green economy and to raise environmental protection standards. . In this framework, many legal regulations have come into force to increase corporate responsibilities for sustainability. The process started in 2014 with the Non-Financial Reporting Directive (NFRD) (3), expanded with the Corporate Sustainability Reporting Directive (CSRD) adopted in 2021 (4) and finally reached a more comprehensive regulatory dimension with the Corporate Sustainability Due Diligence Directive (CSDDD). (5)

On July 25, 2024, the Corporate Sustainability Due Diligence Directive (CSDDD – EU Supply Chain Law) entered into force, which imposes a number of obligations on companies to comply with social and environmental sustainability. (6)

SCOPE AND OBJECTIVES OF THE CSDDD

The Corporate Sustainability Due Diligence Directive (CSDDD) is a regulation that requires companies to assess their impacts on human rights and the environment and take measures to mitigate their negative impacts. The purpose of the Directive is to ensure that companies identify risks and negative impacts on human rights and the environment and establish processes and standards to mitigate these risks. Under the CSDDD, companies are expected to detect and address any adverse human rights and environmental impacts within their own activities, subsidiaries, and supply chain operations. . The Directive also imposes an obligation on large companies to prepare and effectively implement a climate change mitigation plan in line with the 2050 carbon neutrality target set out in the Paris Agreement and the interim targets set out in the European Climate Act.

The CSDDD requires companies to identify actual or potential risks to human rights and the environment and to take concrete measures to mitigate these risks, with a particular focus on large companies. The due diligence process outlined in the directive consists of six key steps, as defined in the Guidance for Responsible Business Conduct, including integrating due diligence into policies and management systems, identifying and assessing risks, preventing, halting, or minimizing adverse impacts, monitoring and evaluating measures, communicating with stakeholders, and ultimately implementing improvement plans.

Directive has a broad scope for both EU-based and foreign companies operating in the EU. In this context, the conditions that organizations and undertakings subject to the provisions of the directive must meet are listed and the criteria that covered enterprises must have;

For EU-based companies:

Companies with an average of more than 1,000 employees and a worldwide net turnover exceeding €450 million in the last financial year,
Companies that do not meet the thresholds set out in subparagraph (a) but are the ultimate parent company of a group that met those thresholds in the last financial year,
Companies that have entered into franchise or royalty agreements with independent third-party companies in the European Union, applying a common identity, business concept and standardized business methods, with royalty revenues exceeding €22.5 million worldwide and net turnover exceeding €80 million worldwide.

For companies based outside the EU:

Companies with a net turnover exceeding €450 million from activities carried out within the European Union,
b) The parent company of a group that does not meet the threshold specified in paragraph (a) but exceeds this threshold.
Companies that have entered into franchise or royalty agreements with independent third-party companies in the European Union, applying a common identity, business concept and standardized business methods, with royalty income exceeding €22.5 million from activities within the European Union and net turnover within the European Union exceeding €80 million.

The Corporate Sustainability Due Diligence Directive (CSDDD) will be implemented in the European Union according to a specific timetable for companies to prevent and mitigate negative impacts on human rights and the environment. Member states of the European Union are obliged to harmonize the Directive with their national legislation and notify the relevant regulations to the European Commission by July 26, 2026. One year later, a phased implementation process will begin for identified groups of companies, with full compliance to be achieved by July 26, 2029.

COMPANY OBLIGATIONS AND PENALTIES

The CSDDD imposes certain obligations on companies. Companies are expected to develop and implement a prevention action plan, where necessary, to prevent situations that may have adverse impacts on human rights and the environment. Companies are also required to enter into contractual safeguards with business partners to ensure compliance with the duty of care. Companies should make financial or non-financial investments, arrangements or improvements to prevent adverse impacts. Companies should align their business plans, practices, policies, overall strategies and operations to ensure wages and incomes that are consistent with living standards, while avoiding practices that may have negative impacts on human rights or the environment. They should also make necessary changes or improvements to their design, distribution and payment practices to address any adverse impacts that may arise from their operations.

Complying with the CSDDD offers several strategic advantages for companies. First, the potential to become a preferred brand by environmentally and socially conscious consumers gives companies a significant competitive advantage. In this way, companies not only differentiate themselves in the market, but also build trust and reputation in society. Another advantage is the operational efficiency gains achieved by improving the supply chain and increasing transparency. These improvements mean more control and less risk in supply chain processes. In addition, companies that comply with ESG (Environmental, Social and Governance) criteria are attracting increased interest in sustainable investments. This strengthens the company’s financial resources by increasing its capacity to attract investment. Finally, companies that comply with the CSDDD have the capacity to adapt more quickly to regulatory changes and global challenges. This increases their long-term resilience and makes them more sustainable in uncertain economic and environmental environments. In addition, by ensuring legal compliance, companies also avoid potential sanctions.

Companies may face serious sanctions for non-compliance with the CSDDD. The criminal sanctions under the Directive can be expressed as Pecuniary Penalties and Public Statement. Companies will be subject to financial penalties if they fail to fulfill legal obligations relating to human rights or the environment. These penalties will be calculated as a percentage of the company’s net global turnover and, as set out in the Directive, the maximum limit of the penalties must not be less than 5% of the company’s net global turnover in the previous financial year. If the company fails to fulfill the financial penalty imposed on it in a timely manner, the name of the offending company and the nature of the breach will be made public.

CONCLUSION

The CSDDD, adopted in line with the European Union’s sustainability goals, is a comprehensive regulation that aims to increase the social and environmental responsibility of companies. This directive is not only a legal obligation, but also a strategic step that companies can benefit from in terms of operational, financial and reputational benefits. In line with the EU’s climate neutrality and sustainable development goals, effective implementation of the CSDDD is critical for the future of both companies and the global community.

As GA Law Office, we offer legal support and consultancy on Corporate Sustainability through our experienced team, based both in Turkey and abroad.

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