09. July 2024

Unpicking the EU directives on corporate responsibility and sustainability

Nicola Bonucci at the High Level Segment of the IACC 2024
Nicola Bonucci (right) spoke about how Collective Action can assist with implementing anti-corruption standards and regulations at the International Anti-Corruption Conference 2024. Photo: STT Lithuania.

An interview with Nicola Bonucci by Lucie Binder, with input from Mirella Mahlstein and Anna Stransky.

Our Collective Action Helpdesk has received several queries about the European Union (EU)’s introduction of two similarly named pieces of legislation: the Corporate Sustainability Reporting Directive (CSRD or “the Reporting Directive”) and the Corporate Sustainability Due Diligence Directive (CSDDD or “the Due Diligence Directive”).

In this interview, Nicola Bonucci explains their purpose, connections and consequences. Nicola is a member of the Board of the Basel Institute on Governance and – among many other career highlights – a long-standing promoter of multi-stakeholder Collective Action approaches to counter corruption and enhance business integrity.

The EU’s focus on responsible business conduct

The EU has placed a strong focus on responsible business conduct in recent years. What are the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive about?

At their heart, the two directives aim at the same purpose: improving the accountability of companies, and especially multinational companies.

The Reporting Directive is the latest evolution of the previously existing Non-Financial Reporting Directive. The new Reporting Directive will cover more companies and will have more indicators. Companies subject to it need to develop a system of reporting based on a set of indicators set out by the EU and they need to make those reports public.

The Due Diligence Directive covers fewer companies than the Reporting Directive but takes accountability a step further. It looks at a company’s accountability for its value chain in relation to two areas: the environment and human rights. It clearly spells out what companies are expected to do to prevent violations and introduce a system for reporting potential grievances.

Imagine a company making public statements under the Reporting Directive. These are tested, in a sense, by stakeholders like civil society. Civil society can scrutinise the public reports to say: Actually, company X is claiming one thing but doing something different with its supply chain.

One can see how this could lead to a new era of accountability and potential responsibility of multinational companies.

Relevance to smaller and non-EU companies

The Due Diligence Directive will initially target large companies established in the EU or those with significant operations in the EU. Why should smaller companies, and those based outside of the EU care about it?

There were intense discussions during the final weeks before the adoption of the Due Diligence Directive about its threshold for application. Eventually, the scope of application was cut drastically.

However, that doesn’t mean smaller companies can ignore it. The companies that will be covered by the Due Diligence Directive – companies with more than 1,000 employees and a minimum worldwide turnover of EUR 450 million – will be responsible for exercising due diligence throughout their supply chains to ensure human rights are respected and the environment is protected. The burden of the due diligence won’t be on small and medium-sized enterprises (SMEs), but SMEs may be covered if they are part of the supply chains of larger companies.

The Due Diligence Directive covers EU-based companies and also extends to non-EU enterprises that have significant business in the European Union, i.e., that meet the same threshold of EUR 450 million in the EU. For example, if you have a U.S. company operating in the EU market meeting the threshold, and this U.S. company has a number of suppliers in Latin America, the U.S. company will have to ensure that the suppliers in Latin America are complying with the spirit of the Directive.

So, the impact of the Directive is much greater than the number of companies it directly covers and includes business partners of EU-based companies worldwide.

Avoiding additional burdens on business

The expansion of rules and regulations relevant to environmental, social and governance (ESG) topics results in increased complexity for companies. Are you concerned that despite good intentions, new legislation such as the Due Diligence Directive could make it too complex to do business in the EU?

The risk is there, absolutely. This was a major concern reflected in the discussions leading up to the final draft. It will be up to the European Commission to come up with practical guidance.

However, the Directive makes an explicit reference to the OECD Due Diligence Guidance for Responsible Business Conduct, which is practically oriented and recognises that we can’t have a one-size-fits-all approach to due diligence.

There is a big question mark over how the Directive will be translated into national legislation. Some national authorities may be more rigorous or demanding than others. The Directive is conscious of that and sets up a coordination mechanism to avoid diverging or overly nuanced jurisprudence.

During the adaptation period of up to two years, these challenges can be sorted out in a constructive dialogue between the business community and the EU authorities. Whatever shape this dialogue may take, companies are well advised to participate in it sooner rather than later. This might help to avoid misunderstandings or tensions over, for example, different interpretations of the Directive.

How Collective Action might help to address challenges

How can Collective Action and other multi-stakeholder approaches help companies – of all sizes – to address these implementation challenges?

Although the Due Diligence Directive puts the burden on companies, we need to recognise that it takes two – or three or four – to tango! Civil society organisations that are willing to enter into dialogue are needed, as are business and other professional associations.

There is huge opportunity for Collective Action and other multi-stakeholder initiatives to help companies work out how to make implementation of the Directive practical and effective. Because at the end of the day, in particular when we talk about due diligence, sometimes the best can be the enemy of the good. If we want the Due Diligence Directive to live up to its potential as a game changer, constructive and fruitful multi-stakeholder dialogue is essential.

In my view, if we miss the opportunity to promote a coordinated, coherent and collaborative approach to implementing this Directive, the backlash could be serious, potentially jeopardising the entire due diligence framework that the EU Commission and Parliament have developed in the last few years.

How companies can prepare

With the introduction of the Due Diligence Directive and similar legislation, doing business may be radically different in the future. How should companies in Europe and beyond prepare for this future?

Looking at the regulation of responsible business conduct from a global perspective, similar efforts as in the EU are also underway in the United States. Within the United Nations, discussions about a binding treaty on business and human rights are ongoing. This means that responsibility and accountability are increasingly important for companies and those in their perimeter.

However, in the current unstable geopolitical environment, there is a risk that ESG becomes a proxy for other battles, resulting in a fragmented or possibly contradictory framework. And there is also a risk that countries outside the EU could capitalise on the fact that many businesses are not part of the value chain of companies within the EU, and therefore operate according to less stringent rules.

My first piece of advice is that companies look at the regulation of responsible business conduct as a whole rather than dealing with separate regulations in isolation. Compliance aspects have piled up. We started with rules on anti-money laundering, then we added competition and later anti-corruption. Now, all the dots need to be connected in a more systematic, holistic and values-based approach. Looking at the EU’s set of instruments as a whole requires companies to take a long, hard look at their corporate governance and compliance system and see if it is fit for purpose in the new climate.

Second, the Due Diligence Directive is also an opportunity for companies to position themselves in an increasingly competitive labour market. Different generations have different expectations and aspirations, and different relationships with their employers. We know that young people are increasingly attracted to work for companies that speak to their values.

Chances of success

Will the new regulations succeed in achieving their aims?

The Corporate Sustainability Due Diligence Directive and the Corporate Sustainability Reporting Directive, together with other regulations in the area of ESG, are clearly designed to improve trust in business and institutions more generally.

While it may be too early to say whether they will succeed, they should be the standard we all aim to achieve. Because ultimately everyone will benefit – and that includes companies.

Nicola Bonucci

Member of the Board