The Corporate Sustainability Due Diligence Directive Explained
Binding Protection for Biodiversity in the Built Environment
This week’s explainer features the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), 2024. The directive holds very large corporations legally responsible for the protection of both human and environmental rights affected in the course of business. This article focuses exclusively on nature-related considerations for the construction sector, highlighting the urgent need for both suppliers and distributors to prepare their business operations and budgets for the application of this new Directive.
“This directive aims to foster sustainable and responsible corporate behavior, contributing to the EU’s transition toward a sustainable economy.”
Diligent Investigation through to Action
Heralded as “the first step towards corporate justice” by the European Coalition for Corporate Justice, the Due Diligence Directive is a historical legal development in the protection of nature rights.
The CSDDD imposes two key responsibilities onto in-scope companies:
1. Value Chain Due Diligence: Identify and address potential and actual adverse environmental impacts in their own operations, their subsidiaries and their value chain business partners.
Adverse environmental impacts are those resulting from breaches of environmental conventions listed in Annex, Part II and environmental degradation, such as harmful soil changes, water or air pollution, or excessive water consumption.
2. Climate Transition Plan: Implement and execute a transition plan for climate change mitigation, outlining how the company aims to achieve climate neutrality by 2050 (Paris Agreement) and intermediate targets (European Climate Law).
Until now, due diligence towards the environment in company value chains has been approached in a piecemeal fashion. France, Germany and Holland have instituted mandatory environmental due diligence requirements, and the EU’s Environmental Liability Directive established a framework based on the 'polluter pays' principle for companies' own operations, but not their value chains which is where up to 80-90% of environmental harm occurs (Impact Assessment Report). Moreover, voluntary due diligence has been slow and fragmented in Europe, failing to address environmental harm occurring past the first link in corporate supply chains (Study, EC).
With the introduction of the CSDDD, companies will be held legally accountable for their environmental impacts and compelled to take proactive action towards mitigating climate change.
Timeline & Scope
The CSDDD was passed by the EU parliament in July 2024 and its application will be phased in to approximately 6,900 very large and high revenue companies between 2027-2029. In-scope entities include EU companies with >1,000 employees and >€450 million turnover (net) worldwide, as well as non-EU companies with > €450 million turnover (net) in EU.
Member States have until July 2026 to transpose the Directive into national law.
Whilst the Directive applies to very large, primarily European companies, reporting extends to adverse environmental impacts of value chain partners and subsidiaries across the globe. This means companies of all sizes and in any location will be impacted if they provide upstream or downstream services to an in-scope entity.
Competitive and prudent business would be best served by proactively implementing procedures, processes and plans as soon as possible, regardless of their placement along the construction value chain. Companies can be guided by the OECD’s 6 stages of due diligence framework which underpins the CSDDD:
In-scope companies are responsible for the cost of establishing and operating the due diligence process. Transition costs, including expenditure and investments to adapt operations and value chains to comply with the due diligence obligation must also be budgeted for.
Enforcement
Whilst there is no clear mechanism for enforcement (or penalisation) until European countries determine their national implementation plans, the EU has provided the following assurances:
Civil liability: victims (natural/legal persons, trade unions and civil society organisations) will be compensated for damages resulting from an intentional or negligent failure to carry out due diligence.
Administrative supervision: rules will be enforced through injunctive orders and fines.
Upstream and Downstream Value Chains Activities
The CSDDD outlines the due diligence coverage of a company’s activities.
Section 25: Upstream business partner activities include “the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of the products and development of the product or the service.”
This degree of due diligence will be challenging for large construction companies, given their extensive and complex supply chains, and reliance on subcontractors and suppliers. Meaningful engagement with affected stakeholders, including employees, trade unions, and communities, is required to effectively identify and address adverse impacts uncovered in due diligence assessments. One practical example of the CSDDD will be the need for site designs to be altered to preserve critical habitats, where construction could cause habitat destruction and fragmentation.
There will be significant flow-on effects to suppliers in the construction value chain who are not directly within scope. As explained in our articles on the Corporate Sustainability Reporting Directive and Sustainable Financial Disclosure Regulation & EU Taxonomy, these organisations are already compelled by investors and the public to address adverse impacts arising from disclosure. With the introduction of the CSDDD, these suppliers will be under even greater pressure to improve the environmental impact of their activities so as to maintain a competitive advantage. For example, developers pushed to prioritise sustainable construction materials alternatives will need to prioritise a product’s environmental impact (from source through to use) in their procurement processes. At its most extreme, the CSDDD may result in business relationships ending if a business partner cannot resolve identified adverse environmental impacts.
Downstream due diligence expectations are equally significant, both in terms of costs and adaptation.
Section 25: “Activities of downstream business partners related to the distribution, transport and storage of the product, where the business partners carry out those activities for the company or on behalf of the company.”
The construction sector is responsible for over 35% of the EU’s total waste generation. Material waste aside, construction activities often lead to sediment-laden runoff entering nearby waterways, leading to marine contamination and turbidity. The CSDDD will impose a higher bar on site waste reduction strategies for all waste types, including air, water, toxic and physical waste.
Given the emphasis in recent years on facilitating circular economies, it is worth noting that the directive expressly exempts companies from extending due diligence to the disposal of their products. Legislation relating to lifecycle ecodesign, not to mention public pressure, may go some way in addressing this loophole.
Conclusion
The built environment will be significantly impacted by the introduction of the Corporate Sustainability Disclosure Directive. The Directive requires a significant reevaluation of business activities along the construction value chain, and will have implications for the industry’s operations, costs and impact. Proactive measures can be taken now to prepare for a sustainable transition towards CSDDD compliance.
Nature Regulation Article Series
This explainer is part of a series of articles on Nature Regulation. The series will explore key regulations affecting nature and biodiversity in the EU and global biodiversity hotspots. The purpose of these articles is to provide clarity and insight into the legal frameworks designed to protect and restore nature.
Planetary Responsibility Foundation Key Facts
Founded: 2022
Headquarters: Copenhagen, Denmark
At PRF, our aspiration is to reverse biodiversity loss in the world’s most biodiversity-rich areas under threat.
We do this through a holistic mindset and mission-driven investments and projects that make a difference for both people and the planet and to create returns that can be reinvested in the foundation's work.
Strategy: The foundation strategy has two components, RESTORE (nature restoration) and RETHINK (sharing knowledge about building and living more sustainably) that guide our work, and help us create lasting impact.
Contact
Jens Böhme, CEO
Tel. +45 2969 5282
jbo@prf.dk
Follow us on LinkedIn and be updated on new articles: