Big changes for big business: a new era of sustainability for 13,000 European companies

The European Union is on the cusp of implementing the groundbreaking Corporate Sustainability Due Diligence Directive (CSDD), which places new requirements on large companies to screen their supply chains for potential human rights violations and environmental damage. This legislation, with far-reaching implications for foreign companies operating in the EU, including those in the US, was approved by the European Parliament in June 2023, and its legislative framework is now being finalised with the expectation of a phased implementation over the coming years. The CSDD symbolizes a move away from a voluntary approach to human rights compliance towards legal enforcement.

 

Historical context and contemporary challenges

The history of entrepreneurship has not always been glorious. From the slave trade to current environmental disasters. A contemporary example - child labour in cobalt mines and forced labour in the garment industry in Africa and Asia. The CSDD is a response to these long-term challenges and seeks to strengthen corporate responsibility and ethics.

For Czech exporters already complying with the German Due Diligence in Supply Chains Act (LkSG), the CSDD represents a further step towards harmonising standards at EU level. This process not only highlights the importance of complying with existing German requirements, but also highlights the need to prepare for upcoming EU-wide regulations. This highlights, among other things, the key importance of Germany as a market and the need to adapt to the European legislative landscape in the areas of sustainability and human rights protection.

Inspiration and access guidelines

Inspired by the 2017 French law, the CSDD extends the concept of corporate responsibility to a broader European context. It targets large companies with more than 500 employees and a global turnover exceeding €150 million, as well as companies in high-risk sectors such as agriculture and textiles with more than 250 employees and a global turnover equal to or greater than €40 million.

These requirements are cumulative, which means that a company must meet both criteria (size of workforce and turnover) in a given category to be subject to the requirements of the Directive. This regulation, which does not include SMEs, applies to a total of 13,000 of the largest companies in the EU, as well as 4,000 companies outside the EU.

The inclusion of non-EU companies is based on the need to ensure that all products and services available on the European market meet the set standards for the protection of human rights and the environment, regardless of their place of origin. In this way, the CSDD promotes sustainable and ethical production and trade at a global level, reaching across EU borders to companies whose activities have a direct impact on the European market.

Key requirements and impacts

The CSDD requires companies to establish comprehensive due diligence processes to identify and address potential human rights violations. This means proactively identifying risks and ensuring that production does not cause harm to human rights or the environment. Although the CSDD does not directly mention specific sanctions, EU Member States, including the Czech Republic, are expected to provide for effective, proportionate and dissuasive sanctions in accordance with this framework. This opens up room for inspiration from the already mentioned German LkSG Act, which is an example with possible sanctions of up to €800,000 or 2% of annual turnover, including the possibility of exclusion from subsidies and public procurement for up to 3 years.

The detailed organisation of supervision and sanctioning at national level will have to be specified by the Member States in the framework of the implementation of the Directive in their legal systems, ensuring that each country, including the Czech Republic, will have a clearly designated national authority responsible for controlling and imposing possible sanctions.

Similar sanctions to those envisaged by the German law on supply chains could be introduced in the Czech Republic. This follows from the obligation of EU Member States to provide for effective, proportionate and dissuasive sanctions in the implementation of the CSDD. The CSDD will enter into force in 2026 at the earliest, and Member States will subsequently be obliged to implement it in their national legislation by 2028 at the latest, by which time Czech companies can be expected to comply fully with the requirements of the Directive.

This Directive is thus another legal instrument tightening the civil liability of companies. This not only expands the liability of companies, but also increases the pressure on their ethical behaviour, as it introduces a novelty for the Czech environment, namely a direct liability relationship between companies and individuals whose rights may be affected by the company's activities, which will arise directly from violations of the Directive's standards. This step represents a significant change that requires companies not only to comply with public law regulations, but also to take into account possible direct claims for damages by injured parties.

Global impact and appeal

The CSDD has the potential to change global human rights practice, although conducting extensive screening in complex supply chains is a challenge. Its implementation underscores the need for a global approach to human rights protection and sustainable business, which requires active participation and adaptation by all companies involved.

It will undoubtedly be necessary for Czech companies to prepare for this change in time and to start thinking now about how active prevention in relation to the issues covered by the CSDD can be most effectively supported, including with the necessary expert legal support, in order to meet all the requirements of both the Directive and the subsequent legislation that will implement the Directive into our legal system.