A picture taken on May 5, 2021 shows a flag of the European Union flying outside the European ... [+]
The United Nations’ Principles for Responsible Investment has released an investor briefing on the European Union’s new Corporate Sustainability Due Diligence Directive. The CSDDD creates a legal liability for companies relating to environmental and human rights violations within their supply chain. PRI’s guidance is intended to help investors navigate the repercussions of the CSDDD.
As the name implies, the CSDDD, also called the CS3D, establishes a corporate due diligence standard on sustainability issues for businesses operating in the EU. In this case, sustainability most directly applies to environmental concerns, climate change, and human rights.
The new due diligence requirements apply not only to the direct actions of the company, but also to their subsidiaries and supply chain. EU based companies, as well as non-EU companies that conduct a set level of business in the EU, could become liable for the actions of their suppliers.
The CSDDD will be phased in over five years. Companies with 5,000 employees and €1,500 million turnover will be impacted in 2027. Companies with 3,000 employees and €900 million turnover will be impacted in 2028. Companies with 1,000 employees and €450 million turnover will be impacted in 2029.
To reach an agreement, the final CSDDD was significantly watered-down from the initial proposal. After delays, the European Parliament approved the CSDDD on April 24, moving it one step closer to formal adoption by the European Union. Once adopted by the EU, the members states will have two years to implement the directive at the national level.
With the adoption of the CSDDD likely, PRI produced the investor briefing. PRI is a UN supported organization of international investors. It was launched in 2006 by UN Environment Programme’s Finance Initiative and the UN Global Compact. PRI “works to understand the investment implications of environmental, social and governance (ESG) factors” and “to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions.”
Currently, 5,372 investment organizations have signed a pledge committing to the six Principles. The commitment begins “As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time).”
The PRI investor briefing analyzes the CSDDD as it relates to the investment sector and ties it to the broader ESG movement. The report notes that the CSDDD will impact only a small number of financial companies, as the threshold standards are very high. However, it further notes that “under PRI’s 2023 reporting framework, 41% of European investors said they used the UN Guiding Principles on Business and Human Rights and / or the OECD Guidelines for Multinational Enterprises to identify intended and unintended sustainability outcomes connected to their investment activities.” Therefore, PRI believes investors will expect CSDDD level risk assessments from companies to calculate the risk.
As the CSDDD generally aligns with the broader sustainability and ESG movement, PRI has been a supporter of its adoption throughout the process. “PRI strongly welcomes this directive. Mandatory human rights and environmental due diligence supports investors’ risk and impact analysis and enables better informed investee engagement. The final requirements are proportionate and practicable and should play a critical role in the achievement of the EU Green Deal which is fundamentally intertwined with EU competitiveness, security and resilience.”
