The European Union is currently experiencing a “legislative tsunami” in the field of sustainable and responsible business, enhanced by the growing awareness of the intersection between business practices, human rights and the environment. It is now widely accepted that businesses play a pivotal role in shaping societies and protecting fundamental human rights, especially in a highly digitalised society where geographical borders, many times used as barriers to confine adverse impacts, seem to be fading away. The times when companies were only focused on profit maximisation, often overlooking the social and human costs of their operations, are increasingly relegated to a past time within the European industrial landscape. Situations of labour exploitation, child labour, environmental degradation, and socio-economic disparity, exacerbated by corporate activities, have been targeted by global movements and regulatory frameworks that are dramatically reshaping the business landscape. We are at a point of no return and must use all available resources and efforts to transform this paradigm shift into a widespread new reality.
The framework established by the UN Agenda 2030 for Sustainable Development and the European Green Deal, this latter further embodied in several legal diplomas such as Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation and Delegated Acts), Directive (EU) 2022/2464 on corporate sustainability reporting (CSRD and Delegated Acts), and the recently adopted Directive on corporate sustainability due diligence (CSDDD), just to name a few, has created a new paradigm where ethical considerations are no longer peripheral but central to business operations.
The CSDDD envisages the harmonised implementation at the European level of a set of obligations related to the environment and human rights, promoting companies’ accountability and commitment towards responsible business conduct. This Directive, which will have to be transposed into national laws by 26 July 2026, foresees a phased implementation period from 2027 until 2029, depending on the dimension of the targeted companies. The scope of this Directive covers large companies, which will be required to integrate human rights considerations into their core policies and governance structures. This includes adopting comprehensive human rights policies, conducting regular impact assessments, and establishing remediation mechanisms, as well as ensuring human rights adherence throughout their chain of activities. This often involves auditing suppliers, fostering fair labour practices, and mitigating risks of forced and child labour.
Companies will be required to put in place a robust and comprehensive due diligence process, with respect to their own operations, those of their subsidiaries, as well as those of their direct and indirect business partners, so as to identify and address actual or potential adverse human rights and environmental impacts. Recital (20) of the CSDDD states that the due diligence process should cover the six steps defined by the OEDC Due Diligence Guidance for Responsible Business Conduct: (1) integrating due diligence into policies and management systems; (2) identifying and assessing adverse human rights and environmental impacts; (3) preventing, ceasing or minimising actual and potential adverse human rights and environmental impacts; (4) monitoring and assessing the effectiveness of measures; (5) communicating how impacts are addressed; and (6) providing for remediation.
In what relates to adverse human rights impacts, it is worth highlighting child labour, forced labour, non-observance of health and safety rules in workplaces, and discriminatory employment practices, the occurrence of which is possible at any stage of the production process and must be prevented, mitigated, ceased and duly repaired.
Although the CSDDD has a limited scope of application due to the defined thresholds, a special note has to be made about SMEs, which may also be included within said scope as a result of being part of the chain of activities of the large companies targeted by the Directive. This indirect application of the Directive ends up increasing its scope and leveraging the effects it intends to achieve, in a context where approximately 90% of European companies are SMEs, representing a huge adjustment effort to adopt business practices and processes relating to the protection and promotion of human rights.
This because whenever a SME forms part of the chain of activities of a large company subject to the obligations imposed by the CSDDD, the latter’s duty to implement a risk-based due diligence process aimed at identifying the probability of occurrence of actual or potential adverse human rights impacts will necessarily impact the business activity and processes of the SME involved, which may even face the risks of no longer being part of the chain of activities of the large company in question and potentially losing market value.
In furtherance of the due diligence process and of the adoption of appropriate measures to prevent, mitigate, cease and/or repair adverse impacts on human rights, companies subject to the CSDDD must provide adequate support to the SMEs included in their chain of activities, such as the provision of access to capacity-building, training or upgrading management systems, and, where compliance with the code of conduct or the prevention action plan would jeopardise the viability of the SME, the provision of targeted and proportionate financial support, such as direct financing, low-interest loans, guarantees of continued sourcing, or assistance in securing financing.
Article 20 of the Directive lays down a series of accompanying measures to be implemented by Member States and/or the European Commission in support of the companies directly or indirectly included within the scope of the Directive. Such accompanying measures include the setting up and operation of individually or jointly dedicated websites, platforms or portals, providing access to relevant information for stakeholders and their representatives on how to engage throughout the due diligence process, or to guidance and guidelines prepared by the Commission. Member States may also financially support SMEs and provide support to stakeholders for the purposes of facilitating their exercise of the rights laid down in the Directive. It is also foreseen that the Commission may complement Member States’ support measures, building on existing Union action to support due diligence in the Union and in third countries, and may devise new measures, including facilitation of industry or multi-stakeholder initiatives to help companies fulfil their obligations.
There is no doubt: this is the new paradigm. Embedding respect for human rights requires a cultural shift within organisations. Fostering an ethical corporate culture, where employees of all levels are called to action and true inclusion and diversity becomes the new normal, must be seen as an essential component of business success and as a competitive advantage, as well as the new challenge ahead. Companies that embrace this new paradigm and effectively implement ethical practices throughout their entire chain of activities will gain brand loyalty, attract conscientious investors, and strengthen their corporate reputation. In the end, this new paradigm will contribute to the broader goal of sustainable development, fostering a more equitable and just world.
