Comprehensive Guide to Understanding the Scope of the CSRD Directive

1.- What is due diligence in the context of corporate sustainability and why is it important?

Due diligence in corporate sustainability refers to the process companies must follow to identify, prevent, mitigate, and remedy the actual and potential adverse impacts of their operations, those of their subsidiaries, and those of their business partners in their value chains on human rights and the environment. This process is crucial as it aims to ensure that companies contribute to sustainable development, protect human rights, and minimize their environmental footprint, addressing growing consumer and investor concerns and complying with international standards.

2.- Which types of companies are subject to due diligence obligations and what are the thresholds for determining if a company falls within the scope of these regulations?

Due diligence obligations apply to companies established in the European Union and third-country companies operating in the EU’s internal market. The thresholds are defined based on size and turnover:

• EU Companies:Those with more than 1,000 employees and a global net turnover exceeding 450 million euros, parent companies of groups reaching these thresholds, or companies with franchising or licensing agreements with royalties exceeding 22.5 million euros and a global net turnover exceeding 80 million euros.
• Third-Country Companies:Those generating a net turnover exceeding 450 million euros in the EU, parent companies of groups reaching these thresholds in the EU, or companies with franchising or licensing agreements in the EU with royalties exceeding 22.5 million euros and a net turnover exceeding 80 million euros in the EU.
• These thresholds must be met for two consecutive financial years for a company to be subject to the obligations.

3.- What are the stages of the due diligence process that companies must implement?

The due diligence process consists of six essential stages:

1. Integrate due diligence into policies and management systems.
2. Identify and assess adverse impacts on human rights and the environment.
3. Prevent, stop, or minimize actual and potential adverse impacts.
4. Monitor and evaluate the effectiveness of measures taken.
5. Communicate the results and the process.
6. Remedy adverse impacts.

4.- How should companies identify and evaluate potential risks and adverse impacts in their value chains?

To identify and evaluate risks, companies must conduct an inventory of their own operations, those of their subsidiaries, and those of their business partners, prioritizing areas with a higher likelihood of adverse impacts. This assessment should include risk factors at the company, operational, geographical, product, and sectoral levels. Additionally, companies must continuously evaluate the human rights and environmental context, considering the impacts of business models, commercial practices, and the hiring practices of their partners. It is important to also consider the needs of vulnerable groups and intersectional factors such as gender, age, race, etc.

5.- What measures should companies take to prevent and mitigate adverse impacts, and what is the priority in addressing these impacts?

Companies should prioritize the prevention and mitigation of adverse impacts based on their severity and likelihood. Measures to be implemented include:

1. Developing and implementing a preventive action plan.
2. Obtaining contractual guarantees from business partners.
3. Making necessary investments and adjustments to the company’s operations and strategies.
4. Collaborating with other companies or entities to improve prevention capacity.
5. Providing support to SMEs in their value chain, both in terms of capabilities and financing.
6. If adverse impacts cannot be prevented or mitigated, companies must refrain from initiating new business relationships with the problematic business partner and, as a last resort, terminate or suspend the business relationship.

6.- What does the obligation to “remedy” adverse impacts mean, and what types of remedial measures can companies adopt?

1. The obligation to “remedy” means restoring affected persons, communities, or the environment to a situation as close as possible to that which existed before the adverse impact, based on the company’s involvement. Companies must take measures such as:
   1. Implementing a corrective action plan.
   2. Obtaining contractual guarantees with business partners.
   3. Making financial and non-financial investments and improvements.
   4. Adapting business plans, strategies, operations, and purchasing, distribution, and design practices.
2. Providing support to supplier SMEs with training, financing, and better management systems. These measures may include financial and non-financial compensation to those affected and reimbursement to public authorities for remedial measures.

7.- How is compliance with due diligence obligations monitored, and what penalties are contemplated in case of non-compliance?

Companies must conduct periodic evaluations of their operations and those of their business partners to monitor the effectiveness of due diligence measures. These evaluations must be carried out at least every twelve months and whenever there is a significant change. National supervisory authorities are responsible for monitoring compliance with these obligations. In case of non-compliance, pecuniary penalties based on the company’s global turnover are contemplated, along with the publication of a public statement detailing the nature of the infringement and the responsible company’s name, among other measures. Decisions by supervisory authorities can be appealed.

8.- What role do sectoral and multilateral initiatives, collaboration with other companies, and the use of third-party verifications play in complying with due diligence?

Sectoral and multilateral initiatives can provide a collaborative framework for due diligence, offering common tools and resources. Companies can participate in these initiatives to share information, risk assessments, and mitigation measures. Collaboration with other companies can increase the influence and effectiveness of actions. Independent third-party verification can validate due diligence efforts, provided these third parties act objectively and independently, with the necessary experience and competence. Additionally, collaboration with other entities is promoted, companies can opt for the implementation of contractual guarantees, and it is necessary for companies to establish and maintain a notification and complaint mechanism accessible to all stakeholders.

9.- What is the role of companies, especially large ones, in achieving the European Union’s sustainability objectives?

Companies in the Union, particularly large ones, are key due to their reliance on global value chains. Their behavior has a direct impact on the success of the Union’s sustainability objectives.

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10.- What do the UN Guiding Principles on Business and Human Rights establish?

These Principles establish that companies must exercise due diligence in human rights. This includes identifying, preventing, and mitigating the negative impacts of their operations and value chains and accounting for these actions.

11.- What is the European Union’s legal commitment regarding climate change for 2030 and 2050?

The Union has legally committed to achieving climate neutrality by 2050 and reducing emissions by at least 55% by 2030. These commitments require significant changes in companies’ production and procurement.

12.- What are the six stages of the due diligence process according to the guide for Responsible Business Conduct?

The stages are: (1) integrate due diligence into policies and management systems; (2) detect and evaluate adverse impacts; (3) prevent, stop, or minimize these impacts; (4) monitor and evaluate the effectiveness of measures; (5) communicate; and (6) remedy.

13.- How is the “chain of activities” defined in this context, and what elements does it include?

The chain of activities includes the operations of business partners involved in the production of a company’s goods or services, encompassing design, extraction, supply, manufacturing, transportation, storage, and supply of raw materials, products, or components. It does not include product disposal.

14.- Which companies are subject to due diligence requirements under this directive?

Companies established in the EU with more than 1,000 employees and a global turnover exceeding 450 million euros, and third-country companies with significant operations in the EU that meet similar income thresholds in the European market, are subject to this directive.

15.- What human rights and environmental rights does this directive cover, and how are “violations” interpreted?

The directive covers human rights, including fundamental labor rights, and environmental rights established in international instruments. A “violation” is interpreted in accordance with international human rights law.

16.- What are companies expected to do when they detect actual or potential adverse impacts in their value chain?

Companies must take measures to prevent or mitigate potential impacts and eliminate or minimize actual adverse impacts. They must also communicate and work with stakeholders to find solutions.

17.- What options do companies have when they cannot prevent or eliminate adverse impacts through due diligence measures?

As a last resort, companies must refrain from initiating new relationships or extending existing ones with problematic partners. Relationships can be suspended, and alternative solutions sought when there are prospects for change.

18.- What role do sectoral and multilateral initiatives play in due diligence, and how can companies get involved?

Sectoral and multilateral initiatives can help companies identify, mitigate, and prevent adverse impacts. Companies can join these initiatives and use their analyses to fulfill their due diligence obligations.

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