Ferma raises concerns with EC over Corporate Sustainability Due Diligence Directive

The Federation of European Risk Management Associations (Ferma) is concerned about key aspects of the recently announced Corporate Sustainability Due Diligence Directive (CSDD), urging the EC to consider a more focused approach to due diligence and calling for more clarity when it comes to civil liability under the proposed rules. 

The EC laid out its proposals for the CSDD in late February. The directive aims to foster sustainable and responsible corporate behaviour throughout global value chains. Companies will be required to identify and, where necessary, prevent, end or mitigate the adverse impacts of their activities on human rights and the environment.

The directive aims to make sure that big European companies and those in high-risk industries take a leading role in mitigating human rights and environmental risks across their value chains, while supporting small companies to do the same.

The directive could come into force as early as 2025 but experts say it may well take longer.

If approved, the rules will apply to the biggest EU firms and those in high-impact sectors. Just short of 13,000 EU companies would fall under the directive’s reach.

The EC explained that the rules would be enforced through national administrative authorities appointed by EU member states, which could impose fines for non-compliance. 

The proposals also introduce civil liability, so that victims have the opportunity to take legal action for damages that could have been avoided with appropriate due diligence measures.

Ferma previously told CRE that the directive puts forward “ambitious and far-reaching proposals” but said there is a “real need for more clarity in certain areas”, particularly around its definition of value chains.

The federation has now had time to consider the proposals in full and believes they represent “another important step forward to the adoption of a robust enterprise risk management (ERM) approach, which will be key to complying with CSDD requirements”.

Main concerns

But in its new position paper on the directive, Ferma raises two main concerns about the CSDD. The first concerns the practical difficulties in implementing due diligence across entire value chains. The second is the “uncertain” civil liability placed on European firms by the proposals.

Ferma tells the EC it sees three big problems regarding sustainability due diligence within value chains under the CSDD as it currently stands. 

It foresees “negative implications” if companies implement the due diligence process proposed in the directive to the letter. For example, companies might have to end business with suppliers operating in countries that fail to comply with environmental or human rights requirements, said Ferma.

“How are companies with, for example, tier two suppliers working in countries with weak records on human rights, such as China, expected to mitigate or bring to an end the full range of potential and actual adverse impacts?,” it asks the EC. 

“How is it possible for businesses to deal with a monopoly supplier of a specific commodity or good being located in a country with environmental standards not in line with those in the EU?” it continues.

Ferma also tells the EC that getting access to the information required to comply with the CSDD could cause risk managers and their companies problems. 

“Based on the experience of some Ferma members with existing legislation in this field (eg the loi relative au devoir de vigilance in France, and the Lieferkettengesetz in Germany), we can say that the ability of EU enterprises to access the appropriate information about suppliers, as well as identify the appropriate sources of information could be challenging. Further, taking into account and analysing the entire value chain in many cases would go beyond the contractual relationships and would require extraordinary additional resources. This could especially be the case where suppliers are located outside of the EU,” it says.

And third, Ferma believes companies could have problems providing evidence that they are complying with the rules on value chains.

“In the instances where an adverse impact cannot be brought to an end, there will be challenges for companies to demonstrate best efforts have been made, or even more concretely, the appropriate actions have been taken. As such, how are companies expected to make this auditable and therefore audited? And what is actually going to be audited?” asks the federation.

Risk-based approach

To help tackle some of the problems envisaged by Ferma, it recommends the EC considers a “more risk-based and focused” approach to direct suppliers. It puts forward a proposal that would ask companies to only carry out sustainability due diligence on their direct suppliers but with a requirement for those suppliers to then focus on the next tier down.

“This could be done through a ‘cascade process’, where each company would oblige (by contractual agreement, for example) their direct suppliers (tier one) to apply the same due diligence process on the suppliers of their suppliers (tier two), and so on,” Ferma tells the EC.

The federation is also concerned about civil liability implications from the CSDD proposals.

“Ferma understands that the civil liability regimes will eventually be framed by member states. We are therefore concerned that gaps may arise across countries, or even be reinforced. This possible patchwork of regimes can contribute to an already challenging compliance map for multinational companies operating in different EU member states. Furthermore, it could lead to an unlevel playing field,” it says in its position paper.

And Ferma “regrets” that there is no clear definition of damages in the CSDD proposal.

“This creates an uncertainty that has (un)clear implications on the scope and perimeter of liability for companies. Furthermore, this is a very challenging area for enterprises right now in the realm of risk transfer: there is less and less coverage available, and further uncertainty in this area could potentially leave many companies more exposed to financial difficulties from lack of coverage,” the federation argues.

Ferma therefore calls on the EC to come up with a minimum “harmonised” civil liability framework under the CSDD at EU level, in order to “minimise gaps” across EU member states and “be clearer regarding the notion of damage”.

Increasing costs

Its position paper also warns that the CSDD is very likely to increase costs for European companies, consumers and society, especially if the rules come into force too quickly.

So, Ferma urges the EC to leave sufficient time to ensure companies have the appropriate systems and processes in place under their ERM to comply with the CSDD’s requirements.

Ferma also told Commercial Risk Europe back in March that interaction between the CSDD and separate Corporate Sustainability Reporting Directive, which has been in the pipeline for some time, may cause headaches for business because the two sets of rules have different scopes and won’t come into effect at the same time.

This is despite the EC wanting them to work hand in hand, with the due diligence directive enforcing accountability and the reporting directive focused on transparency.