25.10.2023

Case law will ultimately clarify the interpretation of the new CSDD Directive

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A directive on corporate sustainability due diligence is being prepared in the EU. The proposed directive would hold large companies liable for the negative impacts of their operations and value chains. The Member States will have to implement the directive within two years of its entry into force.

The proposed directive would obligate companies to set up corporate policies with which they can ensure their human rights and environmental due diligence. Companies would have to identify, prevent, mitigate and correct the negative impact of their operations on a practical level and amend their strategies to match the 1.5 °C target in line with the Paris Agreement.

The proposed directive would require corporate management to see to the execution of due diligence measures. Domestic authorities would supervise compliance with the obligations, and failure to comply could lead to significant sanctions for the company. In Finland, it remains unclear which authority would hold jurisdiction or whether a new authority would need to be established.

While many Finnish companies are leaders in sustainable business, the due diligence obligation creates the need to re-evaluate business structures and strategies from a wider perspective that includes the entire value chain. The first stage of adapting to the changes introduced by the directive will most likely be partly mechanic implementation of the regulation with measures such as internal audits and agreement reviews. However, the impacts of the changes extend deeper: business models must be assessed critically and continuously, and sustainability must be made a cornerstone of corporate strategy.

The proposal is not unambiguous in all respects, and we expect that many issues will have to be settled through legal proceedings. For example, the level of due diligence that is required of companies will ultimately be determined in case law.

Even if corporate policies are in order and the appropriate clauses are included in agreements, proving and assigning ultimate liability may prove to be complicated. For example, will the corporation or the subcontractor be held liable? And what is the liability of company management if the company has failed to comply with its due diligence obligation and is therefore issued a fine corresponding to 5% of its global revenue?