After nearly four years of debate and negotiation, the European Parliament recently passed a final version of the Corporate Sustainability Due Diligence Directive (CSDDD). The CSDDD is a legal framework that will oblige companies to identify and mitigate environmental and human rights issues. From 2028 onwards, Europe’s largest companies will be required to carry out comprehensive due diligence on their own operations and those of their subsidiaries and partners to prevent harms ranging from forced labour to greenhouse gas emissions.

The CSDDD works by imposing broad obligations based on the Organisation for Economic Co-operation and Development (OECD)’s Due Diligence Guidance for Responsible Business Conduct. These include:

  1. Integrating due diligence into corporate policies and risk management plans and systems.
  2. Regularly assessing and identifying both actual and potential adverse human rights and environmental impacts from all corporate operations including subsidiaries and partners.
  3. Prevention and remediation of these adverse impacts.
  4. Active monitoring of supply chains to assess the effectiveness of remedial measures.
  5. Meaningful engagement with stakeholders, including via an annual report on matters covered by the CSDDD.
  6. The creation and maintenance of notification and complaints processes.

As part of this process, the CSDDD requires companies to implement prevention action plans and actively verify that their business partners are compliant. It also requires them to adopt transition plans for climate change mitigation in alignment with the Paris Agreement goal of limiting global warming to 1.5°C above the pre-industrial levels.  These and other provisions will be enforced by government supervision and fines – up to 5% of the net worldwide turnover of the non-compliant company – well as through civil liability for damages caused to individuals by failure to comply with the CSDDD’s stipulations.

These requirements are the product of an intensive EU negotiation process that yielded several important changes to earlier versions of the rule. Two are particularly notable.

First, the scope of the regulation has narrowed from companies with turnover greater than €150m to those with turnover greater than €450m. As a result, only the largest companies will be impacted.

Second, the previous proposal would have required in-scope companies that identified adverse impacts in their value chains to immediately terminate relevant partnerships. Now, companies may establish a corrective timeframe and assess the decision to terminate a partnership against the risk of greater harm from available alternatives. The result is a more constructive process that is less susceptible to external manipulation.

Impact

The CSDDD adds to the growing list of European sustainability regulations, including the EU Corporate Sustainability Reporting Directive, the Forced Labour Regulation, and the EU Deforestation Regulation (EUDR), among others. In many ways, the CSDD is better structured and less burdensome than these others.

Neither palm oil nor Malaysia are discriminated against by the CSDDD, and the few Malaysian companies that fall within the scope of the directive will be able to effectively meet the directive’s requirements because of the sophistication of existing Malaysian supply chains and reporting infrastructure.

In fact, the CSDDD provides an opportunity for the EU to consciously integrate the competencies, experience, and efforts of the Malaysian palm oil sector into its regulatory processes. The MSPO certification system contains ample criteria and indicators consistent with the directive and could be recognized as a compliance tool via the EU’s secondary legislation. This would be an important step towards engaging Malaysia and other Global South nations as equal partners in promoting sustainable development. The same steps should also be taken regarding recognition for MSPO under the EU’s Deforestation Regulation (EUDR).