The Corporate Sustainability Due Diligence Directive

and Amendment 37:

What implications for companies and investors with activities in conflict-affected and high-risk areas?

June 9^th 2023

TrustWorks Global

Geneva, Switzerland

Background 

On June 1^st, 2023, the European Parliament agreed upon its position on the European Union (EU) Corporate Sustainability Due Diligence Directive (CSDD Directive)^[1]. Amendments made and accepted by Parliament would have significant implications for companies with activities in conflict-affected and high-risk areas.

The CSDD Directive, if approved, will require large EU and non-EU companies with significant annual revenue generated in the EU market^[2] to conduct due diligence to identify, and, where necessary, to prevent, mitigate or end negative impacts on human rights and on the environment. It will also require companies to engage with key stakeholders, monitor their operations and supply chains, and to create grievance mechanisms, amongst other obligations.

Amendment 37 – particularly when combined with Amendments 147 on proportionality and 148 on Member State oversight – would require companies to conduct “heightened, conflict-sensitive due diligence”. This post explores how these amendments align with some of the pre-existing standards, and their implications for companies with activities – including operations and supply chains – in conflict-affected and high-risk areas.

“Heightened, conflict sensitive due diligence” in conflict-affected and high-risk areas

The international standard on business’ responsibilities vis-à-vis human rights put forward in the UN Guiding Principles on Business and Human Rights (UNGPs)[3] defines a corporate responsibility to perform human rights due diligence. Central to the notion of due diligence advanced in the UNGPs is the concept of proportionality: the greater the risk, the more robust the due diligence processes must be.[4]

In 2020, the UN Working Group on Business and Human Rights[5] clarified the implications of proportionality for companies that conduct business activities in “conflict-affected and post-conflict regions”: in such contexts, due diligence should be “heightened” so as to include identifying and assessing a company’s actual or potential adverse impacts on human rights, and also its actual or potential adverse impacts on conflict.[6]

Relevant amendments to the CSDD Directive

Amendments adopted by the EU Parliament in June – notably Amendment 37, 147, 148 – aligns the CSDD Directive more closely with the notion of “heightened” human rights due diligence, introducing into the Directive several key components of responsible business activity in conflict-affected and high-risk areas:

• Conflict analysis and conflict-sensitivity: “Complementing the standard due diligence with a thorough conflict analysis, based on meaningful and conflict-sensitive stakeholder engagement and aimed at ensuring an understanding of the root causes, triggers and parties driving the conflict and the impact of the company’s business activities on the conflict.”[7]
• International law: Respecting the obligations and standards identified in International Humanitarian Law (IHL) and International Criminal Law (ICL) standards in situation of armed conflict and/or military occupation.
• Proportionality: Ensuring companies put in place due diligence policies which are proportionate and commensurate to the likelihood and severity of their potential adverse impacts and the severity of their actual adverse impacts.[8] The concept of proportionality recognizes that some factors that elevate risks and impacts derive from characteristics of the contexts in which business activity occurs; risks and impacts are heightened, particularly, in “conflict affected and high-risk” contexts.
• Oversight: Oversight of compliance with Amendment 37 is governed by Amendment 148, which gives EU Member States the responsibility to ensure that companies operating in conflict-affected and high-risk areas “respect obligations under international humanitarian law and conduct heightened, conflict-sensitive due diligence on their operations and business relations.”[9]

Implications for companies

Amendment 37 would obligate companies operating in “conflict-affected and high risk areas” to undertake “heightened, conflict-sensitive due diligence.”[10] The amendment would therefore require companies to identify conflict-affected and high-risk areas and to add elements to their standard due diligence practices when performing due diligence relative to business activities in those areas. Specifically, it would require that companies perform conflict analysis and conflict sensitivity analysis, both based on robust stakeholder engagement, relative to their business activities in those areas.[11]

Implications for investors

Financial institutions were originally excluded from the proposed CSDD Directive, but the amendments proposed by the European Parliament will require institutional investors and asset managers to conduct due diligence on their investee companies in line with the same requirements as those set out for companies,[12] although what precisely this will mean for investors in terms of Heightened Human Rights Due Diligence and conflict-sensitivity is not yet entirely clear. The question remains what requirements will be included in the final text.

Next steps for the CSDD Directive 

The CSDD Directive now goes into what are referred to as “trilogues” with the European Parliament, the Council of the European Union, and the European Commission, which adopted its position in November 2022,[13] to decide on the final text of the legislation.

The trilogues are expected to start soon with the intention to complete negotiations and adopt the final version of the text before June 2024.[14] The CSDD Directive is expected to become applicable, at the earliest, 2 years after its final adoption, in 2026 giving companies and investors alike about three years to prepare for the foreseen changes.

Annexes:

Annex I: Amendments proposed by the European Parliament on the EU Corporate Sustainability Due Diligence Directive in relation to conflict and heightened due diligence.[15]

Amendment 37 – Proposal for a directive Recital 28 b (new)

“In conflict-affected and high-risk areas, companies run an increased risk to be involved in severe human rights’ abuses. In these areas, companies should therefore undertake heightened, conflict sensitive due diligence, in order to address these heightened risks and to ensure that they do not facilitate, finance, exacerbate or otherwise negatively impact the conflict or contribute to violations of international human rights law or international humanitarian law in conflict-affected or high-risk areas. Heightened due diligence includes complementing the standard due diligence with a thorough conflict analysis, based on meaningful and conflict-sensitive stakeholder engagement and aimed at ensuring an understanding of the root causes, triggers and parties driving the conflict and the impact of the company’s business activities on the conflict. In situations of armed conflict and/or military occupation, companies should respect the obligations and standards identified in International Humanitarian Law (IHL) and International Criminal Law (ICL) standards. Companies should follow guidance provided by relevant international bodies, including the International Committee of the Red Cross and the UNDP.”

Amendment 147 – Proposal for a directive Article 5 – paragraph 2 a (new)

“Companies shall carry out a due diligence policy which is proportionate and commensurate to the likelihood and severity of their potential adverse impacts and the severity of their actual adverse impacts, as well as their specific circumstances and risk factors, particularly their sector and location of activity, the size and length of their value chain, the size of the company, its capacity, resources and leverage.”

Amendment 148 – Proposal for a directive Article 5 – paragraph 2 b (new)

“When companies operate in areas in a state of armed conflict or fragile post-conflict, areas under occupation and/or annexation, as well as areas witnessing weak or non-existent governance and security, such as failed states, Member States shall ensure that they respect obligations under international humanitarian law and conduct heightened, conflict-sensitive due diligence on their operations and business relations through integrating into their due diligence, a conflict analysis based on meaningful and conflict-sensitive stakeholders’ engagement, of the root causes, triggers and parties driving the conflict, and of the impact of the company’s activities on the conflict.”