Directive on Corporate Sustainability Due Diligence
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Directive on Corporate Sustainability Due Diligence

5 months ago · 3 min read · AICPA Insights Blog

With the stipulation of the EU Green Deal in 2009, the EU embarked on one of its most ambitious projects so far: becoming the first climate-neutral continent by 2050. This marks a historical attempt to submit elements to a new social contract that has the potential to pave the way for future generations to enjoy a prosperous life that is no longer founded on consumption-based privileges, but, instead, on conscious business decisions taking into account the environmental consequences.

For the Accountancy sector, an important change resulting from this increased focus on sustainability is to be found in the Directive on Corporate Sustainability Due Diligence (CSDD), which is designed to complement the proposed EU Corporate Sustainability Reporting Directive (CSRD) by adding a corporate duty to perform due diligence.

The Directive on Corporate Sustainability Due Diligence (CSDD)

On the 23rd of February 2022, the European Commission published its long-awaited proposal for a Directive on Corporate Sustainability Due Diligence (CSDD). The Directive sets mandatory human rights’ supply chain due diligence rules for large companies headquartered or operating in the EU. The proposals for a CSDD are intended to apply to EU companies with more than 500 employees and EUR 150 million in net turnover worldwide – and companies in high-risk sectors with more than 250 employees and a net turnover of EUR 40 million worldwide.

These proposed new rules are not in force yet, as the proposal for the CDD will now be sent to EU co-legislators – the Council of the EU and the European Parliament – for scrutiny. Co-legislators are likely to significantly amend the CSDD. Once adopted, Member States will have two years to transpose the Directive into national legislation

What are the new requirements being proposed:

Non-EU companies will also be in scope if their net turnover in the EU is over the above thresholds.

In particular, CSDD in-scope companies are required to:

Identify, stop, prevent, mitigate, or account for the impact of their operations and value-chains’ impact on human rights and the environment – as defined in international human rights and environment treaties.

Have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement.

Companies’ directors must integrate these rules when exercising their duty of care to the company – and Member States must update duty of care laws to reflect this.

Lastly, directors’ bonuses must “take into account” the progress made on the company’s climate change compatibility plans.

In time, the directive will fall to be transposed by Member States and enforced by the relevant supervisory authorities, who will be empowered to issue fines to companies that fail to comply. In addition, the proposal contains requirements on civil liability intended to ensure that victims receive compensatory damages if they are harmed by a company’s failure to comply with the due diligence rules.

What it means for accountants:

With the CSDD, the accountancy sector will certainly benefit from a higher level of legal certainty, level playing field to business, and increased transparency. Moreover, sustainability in corporate governance encompasses encouraging businesses to consider environmental, social, human, and economic impact in their business decisions, and to focus on long-term sustainable value creation rather than short-term financial value.

The Association is a member of Accountancy Europe, which has described the proposal as a global milestone but warned that further clarity on some aspects was needed, in particular the extent of companies’ responsibilities regarding directors’ duties of care. It added that due diligence verification by independent third parties (be it the statutory auditor or another service provider) would be crucial to strengthening stakeholders’ confidence in this process.

In particular, companies with parts of their supply chain outside of the EU will need access to reliable information on their suppliers. This means that clarity and transparency will be essential for directors and assurance practitioners. While recognising the benefits of the inclusion of key third-country companies in the proposal, in order to create a level playing field for EU businesses, it will also pose a challenge as to how such companies can control their entire value chains across the world, including third-party suppliers.

Although we support the Commission’s initiative to develop guidelines and supporting mechanisms for SMEs that are affected along supply chains, these guidelines will need to be targeted and clear. We expect the Commission to follow the implementation procedure closely and keep up the dialogue with those affected to ensure supporting mechanisms correspond to their needs.

What are we doing and next steps:

The Directive represents a global milestone for the accountancy sector, although further clarity on some aspects is needed. Therefore, we are monitoring carefully the progress of the draft proposal through the legislative process and will continue to engage on sustainability issues in the EU on behalf of the profession.

ESG is a critical component of future public trust in business and the profession. As ESG reporting becomes more integrated with daily business operations, knowledge of sustainability accounting will likely become increasingly important all accountants. As corporations take a more active role in protecting the planet and improving society, accountants will be involved every step of the way.

The European Commission’s proposal for a Directive on Corporate Sustainability Due Diligence will now be sent to EU co-legislators – the Council of the EU and the European Parliament – for scrutiny. Co-legislators are likely to significantly amend the CSDD. Once adopted, Member States will have two years to transpose the Directive into national legislation.

To read the full Directive Proposal, please click HERE.

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