The impact of the EU’s Corporate Sustainability Due Diligence Directive on businesses in Asia

The regulatory agenda in the EU has continued at full pace with certain regulatory developments affecting non-EU companies with businesses operating in the EU and non-EU companies that are part of a value chain of a company to which the EU Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) applies. In this blog we consider how the CSDDD is likely to impact businesses in Asia.

For businesses in Asia, the key takeaways are:

• The CSDDD will impose human rights and environmental due diligence obligations on non-EU companies that operate in the EU market and hit certain size thresholds. The specific size thresholds are currently under negotiation.
• The impacts of the CSDDD will likely trickle down to companies that do business with entities that are caught by the CSDDD. This may result in increased due diligence requirements, additional contractual assurances, and / or measures to verify compliance (e.g. audits and reporting).

What are the main features of the CSDDD?

In February 2022, the EU Commission published its proposal for the CSDDD (see our client briefing). Since then, the EU Council and the European Parliament have both agreed their negotiating positions on the Commission’s proposal in December 2022 and June 2023 respectively (see our blog posts here and here).

At a high-level, the CSDDD would require in-scope EU and non-EU companies, including financial services (with specific provisions and caveats), to, amongst other things:

• carry out due diligence on human rights and environmental impacts of their own operations, their subsidiaries and their entire value chains (e.g., direct and indirect suppliers);
• prevent, mitigate or bring to an end any identified adverse impacts;
• monitor the effectiveness of their due diligence policies and measures;
• publicly communicate what they are doing on due diligence; and
• remediate any adverse impacts (including through the payment of damages or financial compensation).

The CSDDD may also introduce financial penalties, including civil liability, for companies that fail to comply with these obligations.

How will non-EU companies be impacted by the CSDDD?

In addition to EU companies, the CSDDD also seeks to impose obligations on non-EU companies that operate in the EU market and hit certain size thresholds. 

Under the Commission’s proposal, the following non-EU companies would be captured:

• companies that have a net turnover of more than EUR 150 million in the EU market; and
• companies with a net turnover of more than EUR 40 million in the EU market and at least 50% of net worldwide turnover generated in a high-impact sector (e.g., the manufacture of textiles and food products, agriculture, extraction of mineral resources).

The specific thresholds are expected to be a topic of debate during the trilogue negotiations, with the European Parliament proposing lower turnover thresholds for both EU and non-EU companies. This should be re-assessed when the final directive is agreed upon.

Some EU member states, such as Germany and the Netherlands, have recently introduced their own legislation mandating human rights due diligence regimes in advance of the new EU-wide rules (see here and here), while France is starting to see litigation arise in respect of the due diligence requirements in its 2017 duty of vigilance law (see our recent blog here).

Timing

The Commission’s proposal is currently under negotiation and could be adopted in final form by the end of this year (although this could slip into early 2024). 

If adopted in its current form, Member States will have two years of the Directive coming into force to transpose the Directive into national law (or four years, for companies involved in high-risk sectors).

What has to be reported by in-scope non-EU companies?

The CSDDD does not seek to introduce any new reporting obligations with reporting expected to be integrated into companies reporting requirements under the Corporate Sustainability Reporting Directive (CSRD) (see our blog posts here and here).

Most relevant to non-EU companies, would be the requirement to publish an annual statement in respect of their activities under the CSDDD, that should be published on the companies’ website. The exact content of this statement will be defined by the European Commission through a subsequent implementing act. Such a statement would be required to be published by 30 April each year.

What do companies in Asia have to consider?

The CSDDD is likely to have a significant impact on sustainability disclosure and reporting and on value chains of many companies in Asia. As a first step, companies that do business with the EU should identify any entities in their group that may be subject to the new regulations. The application tests are complex and should be worked through on an entity-by-entity basis.

Companies subject to the Directive will have to adapt their existing systems and processes to source, validate and provide the necessary information. A significant amount of capacity-building and preparation will be required to comply with these new requirements. Companies will also need to ensure that they are actively engaging with how human rights is relevant to, and impacted by, their operations, including and especially at a board level and have the capability and capacity to comply with the requirements if they are “in scope”.

Even if a company does not fall directly within the Directive’s scope of application, it may, nevertheless, be indirectly affected as the Directive’s impact trickles down the value chain. Companies based in Asia are likely to receive requests from EU-based companies (or non-EU companies caught by the CSDDD) for additional information/due diligence or contractual assurances. These contractual assurances may include compliance with a code of conduct or a prevention action plan, and in some cases, measures to verify compliance such as audits and regular reporting.

The CSDDD may require changes to procurement processes and contract terms, e.g., for supply contracts, and the creation of grievance mechanisms to provide effective access to remedy. For many businesses across the globe this will require significant changes to the way they currently operate, transact and report, and how they interact with their business partners.