(Corporate Responsibility) Corporate Sustainability Due Diligence Directive forthcoming for the retail sector

COMMENTARY

On April 24, the Corporate Sustainability Due Diligence Directive was approved by the EU Parliament.

In this article, Irwin Mitchell’s Aaron Ford, Jane Anderson and Katie Byrne take a closer look at the directive and in particular the compliance measures retailers must put in place to avoid falling foul of the new directive.

What is the CSDDD?

The directive creates a legal enforcement and due diligence requirement on sustainability issues for certain companies, including retail companies, operating in the EU. These sustainability requirements are directly attributable to preventing negative impacts on the environment, protecting human rights and slowing climate change.

In practice, the implementation of the directive will mean that certain companies will have an obligation to identify, prevent and eliminate activities that have a negative impact through a series of due diligence measures. Failure to do so will subject them to sanctions.

These obligations will not only require due diligence for companies’ own operations, but will also place a positive requirement on companies to take into account the activities of their subsidiaries and other entities with which they have a direct and/or indirect relationship in relation to their supply chain.

The directive applies to both EU and non-EU companies that fall within certain parameters.

When do the CSDDD requirements come into effect?

Member States have two years to transpose the directive into national law. The directive will be implemented gradually over a longer period of time, so that companies can prepare for compliance with the new directive rules.

What is the likely impact of the CSDDD?

1. Increased due diligence requirements: Companies required to comply with the directive will be required to conduct thorough due diligence to identify and mitigate adverse human rights and environmental impacts in their operations and supply chains.
2. Supply chain transparency: The directive aims to increase transparency by requiring companies to make public information about their supply chains. Companies will be required to provide details of suppliers, subcontractors and the steps they are taking to ensure responsible practices throughout the supply chain.
3. Legal and reputational risks: Non-compliance with the directive could lead to legal sanctions, fines and reputational damage, although to what extent remains to be seen given the implementation timeline. Companies that fail to implement required due diligence measures may face legal action or public scrutiny, which is likely to damage their brand image, reputation and investor and stakeholder confidence.

Which retailers are likely to be affected?

• Companies with 5,000 employees and a turnover of €1,500 million will be affected within three years; reporting is mandatory for the financial year starting on January 1, 2028.
• Companies with 3,000 employees and a turnover of €900 million will be affected within four years; reporting is mandatory for the financial year starting on January 1, 2029.
• Companies with 1,000 employees and a turnover of €450 million will be affected within five years; reporting is mandatory for the financial year starting on January 1, 2030.

What are the sanctions for non-compliance?

Member States will determine the sanctions that will apply to infringements of national provisions adopted under the Directive. However, the directive does require Member States to provide for financial penalties, in addition to a public statement providing details of the company responsible for the infringement, together with details of the infringement in case of non-compliance.

The European Commission recommends dissuasive and proportionate enforcement, which could result in up to 5% of the company’s net global turnover.

Top tips for affected businesses

Retail companies can prepare for the implementation of the directive by:

• Assessing their existing contracts to determine whether they comply with the directive;
• Mapping their existing due diligence policies and procedures to ensure they are in line with the directive;
• map their existing value chain and ensure that they also comply with the directive;
• Identifying its subsidiaries and analyzing their sustainability policies for compliance and raising concerns at an early stage before compliance is required;
• Prepare regulatory responses;
• Identifying current and future business investments and partners to ensure they meet the relevant conditions of the Directive;
• Identifying any new or ongoing environmental and/or human rights risks or areas of non-compliance with the Directive where action can be taken to ensure compliance at the relevant time; And
• Take action now, ready for implementation by Member States.

In summary, retailers will need to adapt their practices, invest in due diligence processes and prioritize sustainability to comply with the directive and mitigate the risks associated with non-compliance.