Unlocking CSDDD Compliance: What businesses need to know

Introduction

Did you know the textile industry employs 91 million people worldwide? Even more surprising, over 50 million of them are women. Sounds like a thriving sector, right? But here’s the harsh reality—many of these women endure unsafe working conditions, unfair wages, and even forced labor.

The problems don’t stop there. The textile industry is also a massive polluter, responsible for 10% of global greenhouse gas emissions—pumping out a staggering 5 billion tonnes of CO₂ every year. This level of pollution is not only devastating ecosystems but also creating operational challenges for companies trying to navigate these increasingly contaminated supply chain regions.

With lives and the planet at stake, we have to ask: What is the government doing?

The Rise of Due Diligence Regulations

To address these problems, the EU has been encouraging businesses to adopt voluntary due diligence practices since 2017. These initiatives aim to protect human rights, children's rights, and the environment standard across the supply chain. However, their impact so far has been limited.

Most of the EU’s effort is focused on tier 1 suppliers—the direct partners of companies—while the majority of human rights abuses and environmental damage occur further down the supply chain.

To make matters worse, very few companies are willing to fully address the broad spectrum of human rights and environmental risks, leading to slow and uneven progress.

To solve this, the EU introduced the Corporate Sustainability Due Diligence Directive (CSDDD). It created a unified legal framework that mandates companies to conduct due diligence on the environmental and human rights impacts across their direct suppliers.

The Global Shift Toward Ethical Supply Chains

The CSDDD builds on national due diligence laws already in place in France, Germany, Norway, the Netherlands, and Japan. Even countries like Canada are considering stricter guidelines. This marks a global shift toward eliminating human rights violations and environmental degradation as business risks.

These regulations place companies under scrutiny, pushing them to enhance social and ecological practices in their direct suppliers. In response, European companies may shift their sourcing away from countries with weak labor and environmental laws, such as China, Bangladesh, Vietnam, and India. Furthermore, as the UN Sustainable Development Goals (SDG) 2030 Agenda reaches its halfway mark, businesses are under increasing pressure to become more responsible.

What is CSDDD?

The Corporate Sustainability Due Diligence Directive (CSDDD) requires large companies by law to identify and reduce negative human rights and environmental impacts in their operations, subsidiaries, and direct suppliers. This is particularly relevant for textile, apparel, and footwear industries, which rely on extensive and often fragmented supply networks.

Companies must assess their own operations, subsidiaries, and direct (Tier 1) suppliers with additional investigations only if there is plausible evidence of issues further down the supply chain.

To achieve this, companies will require significant investments, improved collaboration with stakeholders, and secure contractual guarantees from direct suppliers to enforce sustainable practices.

The directive also adds administrative expenses as companies must ensure their partners follow responsible business practices.

Large companies have to abide by the below-mentioned 6 due diligence measures.

Beyond supply chain oversight, companies must also outline a transition plan aligning their business models with the Paris Agreement’s goal of limiting global warming to 1.5 degrees Celsius. These plans must include:

• Intermediate climate targets are set in five-year increments.
• Regular progress monitoring.
• Annual updates to transition plans overseen by European regulatory authorities.

Stricter Compliance and Accountability

CSDDD imposes stricter obligations but does not require companies to guarantee that no adverse impacts will occur within their direct suppliers. Instead, businesses must acknowledge potential risks and implement measures to mitigate them.

Under this directive, companies must assess their direct suppliers every five years instead of annually, reducing compliance burdens but potentially limiting deeper supply chain oversight.

Key risks include:

• Human Rights Violations: Right to life, liberty, security, enjoy just and favourable conditions at work and fair wages.
• Environmental Degradation: Includes harmful soil changes, water or air pollution, excessive water use, GHG emissions, and deforestation.

Companies failing to comply face severe penalties, including:

• Companies failing to comply may face penalties, but the strict 5% global turnover fine was removed under the EU Omnibus package. Each EU country will set its own penalty system, and enforcement may vary. Non-compliant companies could be publicly named, leading to reputational risks.
• While NGOs and trade unions can’t directly sue companies, victims of human rights abuses or environmental harm can still seek compensation under national laws.
• Non-compliant companies risk losing partnerships, certifications, and market credibility within

CSDDD Scope and Implementation Timeline

The directive applies to both EU-based companies with over 1,000 employees and a net turnover exceeding €450 million and non-EU companies that generate a net turnover of at least €450 million within the EU.

There are 160,000 textile companies operating in the EU—99.5% of which are MSMEs—which means they will not be subjected to CSDDD. However, they will face indirect compliance pressures from larger companies since they are part of their supply chain.

Member States now have until July 26, 2027, to transpose CSDDD into national law.

The first wave of companies must comply starting July 2028, giving businesses more preparation time. The European Commission will also provide guidance documents before implementation to help companies navigate compliance requirements.

The directive will still be fully implemented for all targeted companies by July 2029.

Further, the directive's material scope covers the following human rights and environmental aspects on which companies have to undertake due diligence based on a risk management approach.

Key Requirements Under CSDDD

To comply with CSDDD, businesses must integrate due diligence into risk management frameworks and corporate governance structures. This involves:

1. Policy Development with Employee Input
   • Develop risk management frameworks and codes of conduct with employee participation, ensuring a collaborative approach to design and implementation. For instance, in a textile supply chain, the dyeing process results in polluted drinking water, causing health issues for the locals.
   • Encourage an open and inclusive dialogue between employees at all levels, including leadership and operational teams, to incorporate practical insights and concerns.
2. Identifying and Assessing Adverse Impacts
   • Companies must seek risk data only from suppliers where adverse impacts are most likely. Small suppliers (under 500 employees) only need to provide limited voluntary information under CSRD.
   • Prioritise risks based on likelihood and severity. Focus on the most critical areas first, affecting people, environment, or compliance. For example, in textile production, dyeing processes can pollute water supplies, posing serious health risks.
3. Implementation of Preventive and Mitigating Measures:
   • Take proactive steps to prevent and mitigate identified risks, tailored to the nature of the impact. In the case of polluted water, the textile companies can recycle wastewater, use low dying techniques, adopt closed-loop water systems, adopt fibres that shred minimal microfibers, etc, to prevent water pollution.
   • Consider the company’s ability to influence the situation and develop action plans that may include contractual obligations, investments, or collaborative partnerships. For instance, companies can bind the companies under contract to provide sustainable fibres and fabrics or make investments to upgrade the infrastructure of their partners.
   • If adverse impacts are identified, swift action should be taken to eliminate them. As a last resort, consider suspending or terminating business relationships if those impacts cannot be mitigated.
4. Complaint Mechanisms and Confidentiality:
   • Establish transparent and accessible mechanisms for reporting grievances related to the company’s activities or those of subsidiaries and partners.
   • Ensure that these mechanisms protect the confidentiality of complainants and guard against retaliation, fostering trust and accountability.
5. Periodic Assessments and Policy Updates:
   • Companies with 500+ employees must conduct due diligence reviews every five years instead of annually due to changes introduced in the EU omnibus package, reducing compliance burdens. Smaller companies may have different reporting requirements depending on national regulations.
   • Adjust and update the policy based on assessment findings to ensure continuous improvement and relevance in addressing risks.
6. Reporting on Due Diligence:
   • The companies covered under the Corporate Sustainability Reporting Directive (CSRD) will be required not to report under CSDDD. However, Companies under CSDDD will be required to report due diligence efforts focused on their direct suppliers (Tier 1), with additional disclosures only if there is plausible evidence of issues further down the supply chain.
   • The CSDDD report must be published in accordance with the five-year due diligence assessment cycle. However, companies may still need to provide interim disclosures or ad hoc reports if significant risks are identified. Further, this report must be shared with a collection body to be determined at the member state level.

Next Steps for Companies

To comply with CSDDD and other sustainability regulations, businesses should:

1. Invest in Tech-Driven Solutions: Platforms like Greenstitch help businesses to develop and implement strategies that are both aligned with emerging trends and compliant with regulatory requirements. These platforms streamline processes like data collection, environmental risk assessment, stakeholder engagement, and reporting, making it easier to meet evolving compliance standards.
2. Conduct Supply Chain Assessments: With CSDDD focusing on the Tier 1 supply chain, organisations must conduct thorough evaluations, identifying environmental, social, and governance (ESG) risks. This may involve integrating digital tools like AI for risk detection, blockchain for transparency, and real-time monitoring systems to flag potential sustainability concerns promptly.
3. Enforce Supplier Contracts: This could involve introducing contract clauses that bind suppliers to report on their ESG practices or participate in audits, ensuring alignment with the company’s own due diligence framework.
4. Perform Gap Analyses: Companies need to evaluate current policies, procedures, and practices against the CSDDD requirements for gaps. This will help identify areas where immediate action is required, such as revising procurement practices, strengthening sustainability governance, or improving transparency.
5. Build a Sustainability-Focused Team: According to the Boyden Global Executive Survey 2023, more than half of companies currently lack a dedicated sustainability lead, with only 17% employing a Chief Sustainability Officer and 23% having a dedicated sustainability lead. To fill this gap, businesses must appoint skilled sustainability professionals who can drive the development of sustainability initiatives and ensure long-term compliance.
6. Enhance Data Collection & Transparency: Companies need to implement robust systems to collect and monitor operational data from their own activities as well as from suppliers. This data can be used to track sustainability performance, identify risks, and ensure transparency throughout the supply chain, providing vital insights for decision-making and reporting obligations under CSDDD.

The silver lining of the situation lies in the long-term benefits to the businesses. Reporting under CSDDD will increase attractiveness for talent, sustainability-oriented investors and public procurers, inviting more financial capital into the companies. There is scope for innovation as new avenues have to be explored to ensure human and enironemntal rights are protected. Companies can be better aware of their negative environmental and social impacts which reduce liability risks in future. This way company can manage its business risks better, become resilient to external legislative and regulatory shocks, and increase its competitiveness.

Conclusion

The silver lining of this situation lies in the long-term benefits to the businesses. Companies reporting under CSDDD will attract better talent, investors who are sustainability-oriented, and government tenders, resulting in more financial capital for companies.

There is scope for innovation as new avenues are explored to ensure the protection of human and environmental rights. As companies become more and more aware of the negative environmental and social impact, they will be able to protect themselves from any liability in time. Not just that, companies will be better shielded against external legislative and regulatory shocks and increase their competitiveness.

Resources:

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