EU Corporate Sustainability Due Diligence Directive: what to expect in 2023

If the beginning of the year 2022 has brought great innovations in the development of legislative issues concerning the financial disclosure envisaged by many companies in the process of due diligence in the area of sustainability, this is largely due to the European Union's proposal concerning the 'Corporate sustainability due diligence directive', CSDD for short, published last February 2022.

Through this proposed law, which could hopefully become operational in the course of 2023, the EU aims to lay a fairly strong and well-founded foundation regarding not only the disclosure of companies interested in reporting on the sustainable aspects of their operations, alongside financial and economic values, but also by giving guidelines and legislative input to investigate due diligence along the entire value chain.

How does the CSDD directive  work?

By putting the stakeholders of companies and institutions in general at the centre, the new CSDD proposal, starting from very high principles such as those proclaimed in the UN 'Charter of Human Rights' or the Oecd principles, wants to place the role of stakeholders at the centre of financial disclosure, not only the most direct ones, but considering them throughout the entire value chain.

This revolution, even in thinking and writing a bill proposal, is surely also given by the central importance given to the value chain or 'supply chain', as one often hears it referred to in foreign and foreign publications, for the creation of financial and sustainable impacts in the medium to long term.

So what does this proposed law, the CSDD do, if not start from the basics of a company, which creates financial value and wants in the due diligence phase to attribute the reputation from ESG aspects to its assets?

It simply lists them and declines them, or at least, it tries to do so in the various areas, in some succeeding and in others less so, depending on the reference market in front of it, but in any case overturning the starting point.

In fact, according to this new draft law, it does not start from the top management, but rather from the surrounding environment, from the stakeholders who participate in direct and non-direct forms in the life and development of the company and demand increasingly clear information about it: whether they are workers, investors, private entities or banks or public bodies, through this draft law all participants are considered as stakeholders and are therefore included in the disclosure made during the due diligence phase.

This is because, starting from the supply chain, the slice of analysis is widened and all the countries involved are taken into consideration, not only the territories where the headquarters are located. All the countries involved in company's value chain are therefore susceptible to an evaluation of the company's compliance with the various sustainability criteria required by the CSDD, starting from the centrality attributed to the rights of the worker as a person and the creation of 'sustainable communities'.

In fact, without making much of a mystery of it, sustainability due diligence represents first and foremost a win-win situation for all stakeholders, not limiting and exhausting itself to the two sides of the negotiation, but broadening the analysis on ESG issues precisely to all stakeholders, the territories involved, and thus raising the corporate value analysed.

Therefore, it is necessary, if not indispensable, to immediately start with the basics and make sure that a company that wants to resell itself to the market, is able to make disclosure not only on financial issues in the due diligence phase, but by integrating from the first phase of it, reporting on human rights and environmental issues, in all areas impacted throughout the supply chain. Unless you want to prove it is worthless.

In order to overcome this intent, the CSDD proposes, in fact, to analyse various areas during the disclosure phase, ranging from the notion of liability to civil responsibility, always seen in a more connected manner to governance aspects.

 

Key points of the CSDD proposal

1) Integrate the corporate vision with the concept of 'civil liability', as separating them would limit the corporate vision in terms of establishing relations with stakeholders and, on the other hand, would lead civil society not to believe in the company. This concept of civil responsibility, of course, should also be applied in the more distant and remote parts of the chain, indeed with greater intensity in foreign suppliers.

2) Greater board participation in sustainability issues and, above all, in the due diligence phase, not being limited to mere audit or administrative actions, which would not exhaust the proper ESG-side disclosure required during effective due diligence.

3) Giving a central and priority role to the stakeholders most concerned during the DD, in order to quantify and invest in the company's internal know-how and combine it with the investment perspective, with a view to achieving neutralisation of the adverse impacts that may arise and on which the SFDR also calls for reporting.

In fact, information is also required by the regulations that govern the financial reporting of funds and investors and is closely connected to it, starting from the assumption that through the limitation of "principal adverse impacts" or PAI, the company's level of compliance aimed at "civil liability" can be raised, during the financial transaction and towards all stakeholders, through strong control and monitoring, if necessary.

4) The risk and limitation that must be highlighted in the CSDD bill is certainly that not all sectors are covered at the moment, giving preference to agriculture, textiles, mineral extraction, etc., not thinking at the moment of including financial institutions, which alone could govern the process much better (or at least more rigorously).

5) In fact, the Financial Insitutions sector is only partially included in the CSDD, being currently required to follow the proposal's guidelines only in the pre-contractual Due Diligence phase, i.e. stopping only almost at an NDA, without giving consideration and attention to all the people and stakeholders involved in an industrial and financial buy-sell transaction.    

 

The regulatory framework

What can be the areas of improvement that companies, entities, financial and non-financial institutions can put in place, in order to bring the CSDD proposal towards a more complete enactment?

They are many at the moment in fact, by the way, just compare it with the other laws in force issued by the EU in the field of sustainability and with which it is very similar, such as the SFDR or the disclosure envisaged by the CSRD, but essentially the point is that we never deviate from the environment where business activities are developed and consider the entire supply chain, involving all civil society and workers, as well as considering the environmental impacts and the improvement actions to be implemented.

There is certainly a considerable advantage in analysing ESG aspects throughout the due diligence phase, since when one wants to carry out an operation that increases economic value, it is imperative to start by analysing its intrinsic social value, considering and recognising all the actors and stakeholders involved.

The CSDD should do the same in its latest official proposal due to be published shortly, seeking even more to widen the scope of the legislation, interfacing with the other laws mentioned above and already in force at European level, especially cultivating the chance to present itself as a mirror law and in continuity with the emerging Social Taxonomy, which also focuses on the central role of stakeholders and the value chain.

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