08 Sep '23
The European Parliament passed the Corporate Sustainability Due Diligence Directive (CSDD) on 1 June 2023. This proposed directive mainly applies to sustainability due diligence obligations companies in Europe. This article discusses the main obligations for food companies under the emerging CSDD.
The purpose of the CSDD - in a nutshell - is to establish rules on due diligence obligations by companies. This involves rules on actual and potential adverse impacts on human rights and the environment. relating to their own activities, the activities of subsidiaries and value chain activities carried out by established business relationships. Companies can do this by identifying, preventing, mitigating and accounting for their adverse human rights and environmental impacts, and by ensuring adequate governance, management systems and measures to that end. The CSDD defines established business relationships as: a business relationship, whether direct or indirect, which is, or which is expected to be lasting, in view of its intensity or duration and which does not represent a negligible or merely ancillary part of the value chain. The established nature of these business relationships should be reassessed periodically (at least every 12 months).
Activities that may lead to adverse human rights and environmental impacts can occur in companies' own operations, in their subsidiaries, products and value chains. These activities occur in the procurement of raw materials, manufacturing or at the level of product or waste disposal. For the value chain, it refers to activities related to the production of goods or the provision of services by a company. This includes the development of the product or service and the use and disposal of the product as well as related activities of established business relations of the enterprise that design, extract, manufacture, transport and supply raw materials, products or components of products. Or businesses that provide services to the company necessary to carry out the company's activities, as well as those that use or receive products, parts of products or services from the company until the end of the product's life cycle. Examples include distribution of the product to retailers, transportation and storage of the product, dismantling of the product, recycling, composting or landfilling.
The due diligence obligations only apply to those companies that fall within the scope of the CSDD. The latter stipulates that EU companies with more than 500 employees on average and a worldwide net turnover exceeding EUR 150 million in the financial year preceding the last financial year must with due diligence obligations in the. The due diligence obligations also apply to EU companies that had more than 250 employees and global net turnover of more than €40 million in the financial year preceding the last financial year and that operate in one or more high-impact sectors. These include the manufacture of textiles, leather and related products (including footwear), wholesale trade of textiles, clothing and footwear; agriculture, forestry, fisheries (including aquaculture), the manufacture of food products, wholesale of agricultural raw materials, live animals, wood, food and beverages, etc. The scope of the CSDD also includes companies from third countries that had a net turnover of at least €150 million in the Union in the financial year preceding the last financial year. Finally, it also includes companies that had a net turnover of more than €40 million but less than €150 million in one or more high-impact sectors in the financial year preceding the last financial year.
Companies engaged in the production of food products as well as wholesale trade in agricultural commodities, live animals, food and beverages must comply with the due diligence obligations of the CSDD. As a result, numerous food companies in the Netherlands are required to comply with and implement the due diligence obligations and resulting due diligence measures under the CSDD.
Companies must therefore take appropriate steps to set up and carry out due diligence measures in relation to both their own operations and subsidiaries and established direct and indirect business relationships in their value chains. To this end, this process must cover the six steps defines by the OECD Due Diligence Guidance for Responsible Business Conduct defined six steps: integration of due diligence into policies and management systems, identification and assessment of adverse human rights and environmental impacts, prevention, cessation or minimization of actual and potential adverse human rights and environmental impacts, assessment of effectiveness of measures, communication and providing remediation. Moreover, these obligations and measures are set out in Articles 5 to 11 of the CSDD.
A first obligation for companies under the CSDD is that companies must integrate and have in place a due diligence policy (Article 5 CSDD). According to Article 5 CSDD, this policy should include the following elements:
(a) a description of the company's approach, including in the long term, to due diligence ;
(b) a code of conduct setting out the rules and principles to be followed by the company's employees and subsidiaries (with the code of conduct applying to all relevant business functions and activities, including purchasing and procurement decisions); and
(c) a description of the processes in place to implement due diligence, including the measures taken to verify compliance with the code of conduct and to extend its application to established business relationships.
In addition, to comply with the obligations of due diligence, companies must take measures regarding the identification (Article 6), prevention (Article 7) and termination (Article 8) of adverse effects. For the identification of potential and actual adverse effects, the identification must be based on quantitative and qualitative information. For example, the company should identify and assess the impact of a business relationship's business model and business strategies, including trading, purchasing and pricing practices.
After identifying potential adverse impacts, the company must take a number of actions. Namely:
Moreover, the CSDD provides that if the potential adverse effects are not prevented or sufficiently mitigated by the aforementioned measures, the company must refrain from entering into new relationships or expanding existing relationships with the relevant partner. The company must either temporarily suspend or terminate commercial relationships with the business partner (if the adverse impact is severe).
The next important obligation for companies follows from Article 8 CSDD. The CSDD provides that if the adverse effects cannot be eliminated, the company must take a number of measures. These are the following measures:
Article 9 CSDD also requires the company to provide the possibility for persons and organisations (listed in paragraph 2) to submit complaints to them where they have legitimate concerns regarding actual or potential adverse human rights impacts and adverse environmental impacts with respect to their own operations, the operations of their subsidiaries and their value chains.
Finally, companies should periodically review their own activities and actions, those of their subsidiaries and, if related to the company's value chains, those of their established business relationships. This is to monitor the effectiveness of the identification, prevention, mitigation, bringing to an end and minimisation of the extent of human rights and environmental adverse impacts.
Small and medium-sized enterprises, although in principle exempted from the CSDD, may also be indirectly affected by the CSDD. This is the case, for instance, if these companies supply as a direct or indirect business relationship to a company that does fall within the scope of the CSDD. They may face costs because they have to impose requirements on their own suppliers at the request of larger business partners. However, the CSDD does provide that when contractual guarantees are obtained from or an agreement is entered into with a small or medium-sized enterprise, the terms used must be fair, reasonable and non-discriminatory. The CSDD also provides that when measures are taken in respect of small and medium-sized enterprises to verify compliance, the enterprise must bear the cost of verification by an independent third party.
A considerable amount of obligations will thus shortly apply to companies under the CSDD. The CSDD is expected to be finalised late this year or early next year, after which member states will have to implement this legislation into national law within two years. Food companies are therefore advised to get a timely orientation on the due diligence obligations that will apply under the CSDD, as well as the measures to be taken and implemented in that framework.
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