The EU's Corporate Sustainability Due Diligence Directive: A Step Forward, But Room for Improvement

The EU's Corporate Sustainability Due Diligence Directive: A Step Forward, But Room for Improvement

Introduction:
The new agreement on the EU Corporate Sustainability Due Diligence Directive marks a landmark step forward in holding companies accountable for their human rights and environmental impact. This directive will require the largest companies in Europe to undertake due diligence to identify, assess, mitigate, and remedy harm caused in their value chains. While this is a positive development, there are areas where greater policy coherence is needed. In this article, we will explore the key points of the directive and discuss its limitations. Additionally, we will provide actionable advice for policymakers and companies to enhance responsible business conduct.

1. Limited Coverage and Weak Climate Duties:
   One of the shortcomings of the directive is its limited coverage of the financial sector. While it is encouraging that the European Commission has committed to developing a separate due diligence directive for the financial sector, the current directive falls short in addressing climate impacts. Companies' failure to implement their climate plans should carry liability, yet this obligation is not adequately enforced. The scope of the directive should be expanded to include asset managers, banks, and insurance companies, ensuring that all sectors are held accountable for their climate responsibilities.

2. Insufficient Downstream Scope:
   The directive sets a narrower scope of coverage for downstream impacts. It is crucial to recognize that downstream activities can have significant environmental and human rights implications. By excluding certain entities as "negligible or merely ancillary," we risk overlooking high-risk business activities that should be subject to due diligence. Instead, downstream operations should be included in the value chain scope, ensuring comprehensive assessment and mitigation of harm caused throughout the entire chain.

3. Lack of Alignment with OECD Guidelines:
   The directive's misalignment with the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct is concerning. In February 2023, 50 states, including 25 EU Member States, called for alignment between national and regional responsible business conduct initiatives and the OECD Guidelines. To strengthen the international normative framework, policymakers in the EU and other countries must prioritize alignment with these guidelines. This will ensure consistency and coherence in responsible business practices globally.

Actionable Advice:

1. Strengthen the Financial Sector's Responsibilities: Policymakers should expedite the development of a separate due diligence directive for the financial sector, ensuring that asset managers, banks, and insurance companies are held accountable for their human rights and environmental impact. This will close the current gap in climate duties and broaden the coverage of responsible business conduct.

2. Expand Downstream Scope: The directive should include downstream activities within the value chain scope. By recognizing the potential risks and impacts of these activities, companies will be compelled to assess and address harm caused throughout the entire chain. This comprehensive approach will contribute to more effective due diligence efforts.

3. Prioritize Alignment with OECD Guidelines: Policymakers in the EU and other countries should prioritize alignment with the OECD Guidelines for Responsible Business Conduct. By harmonizing national and regional initiatives with these guidelines, a stronger normative framework can be established, ensuring consistent and coherent responsible business practices globally.

Conclusion:
While the EU's Corporate Sustainability Due Diligence Directive represents a positive step forward in holding companies accountable for their impact, there is room for improvement. The limited coverage, weak climate duties, insufficient downstream scope, and lack of alignment with the OECD Guidelines highlight the need for greater policy coherence. By strengthening the financial sector's responsibilities, expanding downstream scope, and prioritizing alignment with international guidelines, policymakers and companies can enhance their responsible business conduct efforts. It is crucial to continue striving for comprehensive and effective due diligence practices that address the full range of environmental and human rights challenges in corporate value chains.