Effective July 25, the EU Corporate Sustainability Due Diligence Directive (CSDDD), which has an indirect yet vital impact on Turkish companies, requires proactive management of human rights and environmental impacts. Companies must first conduct due diligence, establish effective codes of conduct, invest in green transformation, develop reporting mechanisms, and engage in regular reporting. The CSDDD is not merely a compliance obligation but also provides an ethical framework and business opportunities, significantly contributing to long-term success.
Drawing on the United Nations Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines on Responsible Business Conduct for Multinational Enterprises, the Corporate Sustainability Due Diligence Directive ("CSDDD") is regarded as an important achievement in advancing human rights and environmental protection.
The Directive is a new legal regulation that mandates companies to manage their impacts on human rights and the environment. This responsibility extends not only to the company itself, but also to its subsidiaries and business partners in the supply chain. Companies are required to identify, prevent and mitigate their own and all their stakeholders' negative impacts on human rights and the environment.
Although some of the burdensome obligations in the first draft of the Directive were eased as a result of objections, compliance with the directive, which was published in the Official Journal of the EU on July 5, 2024, and entered into force on July 25, 2024, remains critically important for companies. However, the CSDDD should not be viewed solely as a mandatory obligation. Compliance with the Directive offers both an ethical framework and numerous business opportunities, encouraging companies to proactively manage their human rights and the environmental impacts. This Directive provides companies with:
-Greater customer trust and employee engagement,
-Better risk management,
-Increased competitiveness,
-Investor attractiveness,
-Innovation, and
-Access to finance
By developing a sustainability-oriented business model, companies can achieve long term success and enhance their reputation within the society.
Does the Directive Affect Turkish Companies?
Given the turnover threshold of EUR 450,000,000, which is one of the criteria for the Directive's applicability, Turkish companies will predominantly be indirectly affected.
Since the EU company covered by the Directive will also be responsible for the negative impacts on human rights and the environment caused by the Turkish companies in its supply chain, Turkish companies will need to indirectly comply with the relevant obligations. In other words, while the impact of the Directive on Turkish companies exporting to the EU will be indirect, it is nonetheless significant.
The EU company covered by the Directive is likely to require the Turkish company to comply with the CSDDD through their commercial relationship. This may involve contractual provisions related to recourse, indemnification liability, improvement programs, periodic reporting, and termination of the contract for just cause.
Our previous article on the CSDDD's obligation thresholds and its development can be found here.
Implementation and Responsibility
The rules concerning corporate sustainability due diligence will be implemented through principles of administrative oversight and legal liability. Administrative oversight will be managed by the European Commission's European Network of Supervisory Authorities, which will supervise the enforcement of the rules and impose injunctions with effective, proportionate and dissuasive penalties. Legal liability will provide injured parties with the right to compensation, acting as a safeguard for the system.
According to Article 20 of the Directive, fines may reach up to 5% of a company's net turnover. Furthermore, compliance with the CSDDD may become a criterion for receiving investment or state concessions. Companies not directly subject to the CSDDD but with business partners within its scope may be required to compensate or terminate relationships with those partners if they fail to address adverse environmental or human rights impacts.
What Should Companies Do?
Step 1: Companies Should Assess Their Human Rights and Environmental Impacts Through Due Diligence:
To proactively manage risks related to human rights and environmental issues companies should establish a due diligence policy and integrate it into their risk management systems. This policy should provide an overview of the company's long-term strategy, outline the procedures to be implemented at all relevant levels of the company and detail the measures taken to ensure compliance with the code of conduct.
Due diligence policies should be kept current and reviewed at least every 24 months. However, significant changes – whether in the company's operations, its subsidiaries, business partners, or the legal or business environment - may necessitate prompt updates to the policy.
Incorporating due diligence into risk management systems should align with international frameworks and ensure that due diligence obligations are fulfilled and audited.
Key actions include:
- Active use of existing management systems,
- Adoption of a company-specific risk management system,
- Appointment of a human rights and environmental officer,
- Establishment of a compliance committee, and
- Designation of a compliance officer
Step 2: Establish a Code of Conduct for the Company and All Stakeholders:
The Company should develop a code of conduct policy applicable to itself and its subsidiaries to enhance transparency and accountability, prevent risks and promote ethical behavior. This code of conduct should also be enforceable by direct and indirect business partners. It must be integrated across all corporate functions and operations, including procurement, employment, and purchasing decisions. Companies should consult with employees and stakeholders when establishing the code of conduct and monitor its implementation.
Step 3: Invest in Green Transformation:
Companies should prepare and implement transition plans to mitigate climate change impacts in alignment with the goals set out in the Paris Agreement and the European Climate Law. Companies within scope should adjust their business strategies to aim for limiting global warming to 1.5°C and develop plans with concrete steps to achieve net zero emissions. These plans should encompass emission reduction targets, carbon capture and storage projects, sustainable investments, supply chain management, and transparency and reporting mechanisms. Although challenging, this investment is critical for combating global warming and provides benefits to both the environment and shareholders.
Step 4: Establish a Reporting Mechanism and Whistleblower Policy:
The company should set up a mechanism for both internal and external stakeholders to report concerns or complaints regarding compliance with the CSDDD. The mechanism must ensure that reports are handled promptly and effectively by offering multiple reporting channels and ensuring transparency and accessibility. It is also essential to provide individuals with the option to report anonymously.
Step 5: Obtain Contractual Assurances from Business Partners:
Ensuring that business partners throughout the supply chain comply with the CSDDD and obtaining commitments from them is crucial. For stakeholders that do not comply with the CSDDD, fail to monitor and mitigate negative impacts on human rights and the environment, or are insufficient in this regard companies may need to implement improvement programs, periodic reporting requirements, indemnification obligations. As a last resort, unilateral termination of the commercial relationship for just cause may be necessary. Crafting a balanced commitment text that maintains the integrity of the commercial relationship while supporting compliance may require the precision of an art form.
Step 6: Act in Collaboration with Stakeholders:
Develop a comprehensive strategy to ensure compliance with the CSDDD through open and transparent communication and collaboration with all stakeholders. Employees, investors and every actor in the supply chain should be informed about the CSDDD, employees should be educated about the company's compliance plan, feedback should be solicited from stakeholders, and joint improvement efforts should be made to enhance compliance with the CSDDD.
Step 7: Periodically Monitor and Report on the Measures Taken. Be Prepared for the Parent Company's Audit:
The continuity of the measures taken is crucial, so processes must be regularly monitored and reported. This should primarily be achieved through internal audits, which will also prepare the company for any potential audit by the parent company within the framework of the contractual relationship.
Step 8: Fulfill the Public Disclosure Obligation:
The Directive's social responsibility aspect imposes a public disclosure requirement. This can be met through periodic reports published on the appropriate platforms, such as the company's website.
Conclusion
The CSDDD should be viewed not merely as a legal obligation but as a vital key to long-term success. It offers companies an ethical framework and opens up numerous opportunities. By adhering to this directive, companies are not only preparing for the future but also contributing to the creation of a more just and sustainable world.
References
Corporate sustainability due diligence. (n.d.). Retrieved from European Commission: https://commission.europa.eu/business-economy-euro/doing-business-eu/sustainability-due-diligence-responsible-business/corporate-sustainability-due-diligence_en
Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859Text with EEA relevance. (2024, June 13). Retrieved from EUR-Lex: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L_202401760
Overview of the Corporate Sustainability Due Dilligence Directive; Advancing Corporate Responsibility. (2024, May). Retrieved from European Coalition for Corporate Justice: https://corporatejustice.org/wp-content/uploads/2024/05/ECCJ-CSDDD-SUMMARY.pdf
Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937. (2024, March 15). Retrieved from European Council - Council of the European Union: https://data.consilium.europa.eu/doc/document/ST-6145-2024-INIT/en/pdf
The Corporate Sustainability Due Diligence Directive (CSDDD) - Directive (EU) 2024/1760. (n.d.). Retrieved from The Corporate Sustainability Due Diligence Directive (CSDDD): https://www.corporate-sustainability-due-diligence-directive.com/
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