Preamble 41 to 50.
(41) Under the due diligence obligations provided for in this Directive, a company should identify and assess actual or potential adverse human rights and environmental impacts. In order to allow for a comprehensive identification and assessment of adverse impacts, such identification and assessment should be based on quantitative and qualitative information, including the relevant disaggregated data that can be reasonably obtained by a company.
Companies should make use of appropriate methods and resources, including public reports. For instance, as regards adverse environmental impacts, the company should obtain information about baseline conditions at higher risk sites or facilities in its chain of activities.
As part of the obligation to identify adverse impacts, companies should take appropriate measures to map their own operations, those of their subsidiaries and, where related to their chains of activities, those of their business partners, in order to identify general areas where adverse impacts are most likely to occur and to be most severe. Based on the results of such mapping, companies should carry out an in-depth assessment of their own operations, those of their subsidiaries and, where related to their chains of activities, those of their business partners, in the areas where adverse impacts were identified to be most likely to occur and most severe.
When identifying, and assessing adverse impacts, the company should take into account, based on an overall assessment, possible relevant risk factors, including company-level risk factors, such as whether the business partner is not a company covered by this Directive; business operation risk factors; geographic and contextual risk factors, such as the level of law enforcement with respect to the type of adverse impacts; product and service risk factors; and sectoral risk factors. When identifying and assessing adverse impacts, companies should also identify and assess the impact of a business partner’s business model and strategies, including trading, procurement and pricing practices.
With a view to limiting the burden on smaller companies created by requests for information, where information necessary for the identification of adverse impacts can be obtained from business partners at different levels of their chains of activities, companies should exercise restraint with regard to business partners that do not themselves present risks of adverse impacts and favour reaching out, where reasonable, directly for more detailed information to business partners at levels in their chains of activities where, based on the mapping, actual or potential adverse impacts are most likely to occur.
Identification of adverse impacts should include assessing the human rights and environmental context in a dynamic way and at regular intervals: without undue delay after a significant change occurs, but at least every 12 months, throughout the life cycle of an activity or relationship, and whenever there are reasonable grounds to believe that new risks may arise.
A significant change should be understood as a change to the status quo of the company’s own operations, operations of its subsidiaries or business partners, the legal or business environment or any other substantial shift from the situation of the company or its operating context. Examples of a significant change could be cases when the company starts to operate in a new economic sector or geographical area, starts producing new products or changes the way of producing the existing products using technology with potentially higher adverse impacts, or changes its corporate structure via restructuring or via mergers or acquisitions.
Reasonable grounds to believe that there are new risks may arise in different ways, including learning about the adverse impact from publicly available information, through stakeholder engagement, or through notifications. If, despite having taken appropriate measures to identify adverse impacts, companies do not have all the necessary information regarding their chains of activities, they should be able to explain why that information could not be obtained and should take the necessary and reasonable steps to obtain it as soon as possible.
(42) In conflict-affected and high-risk areas, as defined in accordance with Regulation (EU) 2017/821, human rights abuses are more likely to occur and to be severe. Companies should take this into account when integrating due diligence into their policies and risk management systems to ensure that codes of conduct and processes put in place to carry out due diligence are adapted to conflict-affected and high-risk areas, in a manner that is consistent with international humanitarian law, as laid out in the Geneva Conventions of 1949 and their additional protocols.
Companies should take into account that such situations constitute particular geographic and contextual risk factors when performing in-depth assessments as part of the identification and assessment process, when taking appropriate measures to prevent, mitigate, bring to an end and minimise identified adverse impacts, and when engaging with stakeholders. For this purpose, companies may rely on the Commission’s guidance on the assessment of risk factors associated with conflict-affected and high-risk areas, which should take into account the UN Development Programme’s guidance ‘Heightened Human Rights Due Diligence for Business in Conflict-Affected Contexts. A Guide’.
(43) This Directive should be without prejudice to the rules on professional secrecy applicable to lawyers or to other certified professionals who are authorised to represent their clients in judicial proceedings, in accordance with Union and national law.
(44) Where a company cannot prevent, mitigate, bring to an end or minimise the extent of all the identified actual and potential adverse impacts at the same time to the full extent, it should prioritise the adverse impacts based on their severity and likelihood.
The severity of an adverse impact should be assessed based on the scale, scope or irremediable character of the adverse impact, taking into account the gravity of the impact, including the number of individuals that are or will be affected, the extent to which the environment is or may be damaged or otherwise affected, its irreversibility and the limits on the ability to restore affected individuals or the environment to a situation equivalent to their situation prior to the impact within a reasonable period of time. Once the most severe and likely adverse impacts are addressed in reasonable time, the company should address less severe and less likely adverse impacts.
On the other hand, actual or potential influence of the company on its business partners, the level of involvement of the company in the adverse impact, the proximity to the subsidiary or the business partner, or its potential liability should not be considered relevant factors in the prioritisation of adverse impacts.
(45) Under the due diligence obligations provided for in this Directive, if a company identifies potential adverse human rights or environmental impacts, it should take appropriate measures to prevent or adequately mitigate them.
To provide companies with legal clarity and certainty, this Directive should set out the actions companies should be expected to take for prevention and mitigation of potential adverse impacts, where relevant depending on the circumstances. When assessing the appropriate measures to prevent or adequately mitigate adverse impacts, due account should be taken of the so-called ‘level of involvement of the company in an adverse impact’ in line with the international frameworks and the company’s ability to influence the business partner causing or jointly causing the adverse impact.
Companies should take appropriate measures to prevent or mitigate the adverse impacts that they cause by themselves (so-called ‘causing’ the adverse impact as referred to in the international framework) or jointly with their subsidiaries or business partners (so-called ‘contributing’ to the adverse impact as referred to in the international framework).
This applies irrespective of whether third parties outside of the company’s chain of activities are also causing the adverse impact. Jointly causing the adverse impact is not limited to equal implication of the company and its subsidiary or business partner in the adverse impact, but should cover all cases of the company’s acts or omissions, causing the adverse impact in combination with the acts or omissions of subsidiaries or business partners, including where the company substantially facilitates or incentivises a business partner to cause an adverse impact, that is, excluding minor or trivial contributions.
When companies are not causing the adverse impacts occurring in their chains of activities themselves or jointly with other legal entities, but the adverse impact is caused only by their business partner in the chains of activities of the companies (so-called ‘being directly linked to’ the adverse impact, as referred to in the international framework), they should still aim to use their influence to prevent or mitigate the adverse impact caused by their business partners or to increase their influence to do so. Using only the notion of ‘causing’ the adverse impact instead of the aforementioned terms used in the international frameworks avoids confusion with existing legal terms in national legal systems while covering the same causal relationships described in those frameworks.
In this context, in line with the international frameworks, the company’s influence on a business partner should include on the one hand its ability to persuade the business partner to prevent adverse impacts, (for example through market power, pre-qualification requirements or linking business incentives to human rights and environmental performance), and, on the other hand, the degree of influence or leverage that the company could reasonably exercise, for example through cooperation with the business partner in question or engagement with another company which is the direct business partner of the business partner associated with the adverse impact.
(46) So as to comply with the prevention and mitigation obligation provided for in this Directive, companies should be required to take the following appropriate measures, where relevant. Where necessary due to the complexity of prevention measures, companies should develop and implement a prevention action plan.
Companies should seek to obtain contractual assurances from a direct business partner that it will ensure compliance with the code of conduct and, as necessary, the prevention action plan, including by seeking corresponding contractual assurances from its partners to the extent that their activities are part of the chains of activities of the companies. Contractual assurances should be designed to ensure that responsibilities are shared appropriately by the company and the business partners.
The contractual assurances should be accompanied by appropriate measures to verify compliance. However, the company should only be obliged to seek the contractual assurances, as obtaining them may depend on the circumstances. To ensure comprehensive prevention of potential adverse impacts, companies should also make financial or non-financial investments, adjustments or upgrades which aim to prevent adverse impacts, and collaborate with other companies, in compliance with Union law.
Where relevant, companies should adapt business plans, overall strategies and operations, including purchasing practices, and develop and use purchasing policies that contribute to living wages and incomes for their suppliers, and that do not encourage potential adverse impacts on human rights or the environment. To conduct their due diligence in an effective and efficient manner, companies should also make necessary modifications of, or improvements to, their design and distribution practices, to address adverse impacts arising both in the upstream part and the downstream part of their chains of activities, before and after the product has been made.
Adopting and adapting such practices, as necessary, could be particularly relevant for the company, to avoid an adverse impact in the first instance. Such measures could also be relevant to address adverse impacts that are jointly caused by the company and its business partners, for instance due to the deadlines or specifications imposed on them by the company. In addition, by better sharing the value along the chain of activities, responsible purchasing or distribution practices contribute to fighting against child labour, which often arises in countries or territories with high poverty levels.
Companies should also provide targeted and proportionate support for a small and medium-sized enterprise (SME) which is a business partner of the company, where necessary in light of the resources, knowledge and constraints of the SME, including by providing or enabling access to capacity-building, training or upgrading management systems, and, where compliance with the code of conduct or the prevention action plan would jeopardise the viability of the SME, providing targeted and proportionate financial support, such as direct financing, low-interest loans, guarantees of continued sourcing, or assistance in securing financing. The notion of ‘jeopardising the viability of an SME’ should be interpreted as possibly causing a bankruptcy of the SME or putting the SME in a situation where bankruptcy is imminent.
(47) Tackling harmful purchasing practices and price pressures on producers, particularly smaller operators is especially important in relation to sales of agricultural and food products. In order to address the power imbalances in the agricultural sector and ensure fair prices at all links in the food supply chain and strengthen the position of farmers, large food processors and retailers should adapt their purchasing practices, and develop and use purchasing policies that contribute to living wages and incomes for their suppliers. By applying only to the business conduct of the largest operators, that is, those with a net worldwide turnover of more than EUR 450 000 000, this Directive should benefit agricultural producers with less bargaining power.
Moreover, given companies formed in accordance with the law of a third country are equally subject to this Directive, this would protect agricultural producers in the Union against unfair competition and against harmful practices by operators established not only inside but also outside the Union.
(48) In order to reflect the full range of options for the company in cases where potential adverse impacts could not be addressed by the described prevention or mitigation measures, this Directive should also refer to the possibility for the company to seek contractual assurances from the indirect business partner, with a view to achieving compliance with the company’s code of conduct or a prevention action plan, and conduct appropriate measures to verify compliance of the indirect business partner with the contractual assurances.
(49) It is possible that prevention of potential adverse impacts would require collaboration with another company, for example, at the level of an indirect business partner with a company, which has a direct contractual relationship with the indirect business partner in question. In some instances, a collaboration with other entities could be the only realistic way of preventing potential adverse impacts being caused even by direct business partners if the influence of the company is not sufficient.
The company should collaborate with the entity which can most effectively prevent or mitigate potential adverse impacts solely or jointly with the company, or other legal entities, while respecting applicable law, in particular competition law.
(50) In order to ensure that appropriate measures for the prevention and mitigation of potential adverse impacts are effective, companies should prioritise engagement with business partners in their chains of activities, instead of terminating the business relationship, as a last resort after attempting to prevent and mitigate adverse potential impacts without success.
However, this Directive should also, for cases where potential adverse impacts could not be addressed by such appropriate measures, refer to the obligation for companies, as a last resort, to refrain from entering into new or extending existing relations with the partner in question and, where there is a reasonable prospect of change, by using or increasing the company’s leverage through the temporary suspension of the business relationship with respect to the activities concerned, adopt and implement an enhanced prevention action plan for the specific adverse impact without undue delay including a specific and appropriate timeline for the adoption and implementation of all actions therein, during which the company may also seek alternative business partners.
Factors determining the appropriateness of the timeline for adoption and implementation of such actions could include the severity of the adverse impact, the need to identify and take steps to prevent or mitigate any additional adverse impacts, including impacts on SMEs or smallholders.
Companies should suspend their business relationships with the business partner, thereby increasing their leverage and increasing the chances that the impact is addressed. Where there is no reasonable expectation that these efforts would succeed, for instance, in situations of state-imposed forced labour, or where the implementation of the enhanced prevention action plan failed to prevent or mitigate the adverse impact, the company should be required to terminate the business relationship with respect to the activities concerned if the potential adverse impact is severe. In order to allow companies to fulfil that obligation, Member States should provide for the availability of an option to terminate the business relationship in contracts governed by their laws.
In deciding to terminate or suspend a business relationship, the company should assess whether the adverse impacts of doing so could be reasonably expected to be manifestly more severe than the adverse impact that could not be prevented or adequately mitigated. Where companies temporarily suspend or terminate the business relationship, they should take steps to prevent, mitigate, or bring to an end the impacts of suspension or termination, provide reasonable notice to the business partner and keep that decision under review.
It is possible that prevention of adverse impacts at the level of indirect business relationships requires collaboration with another entity. In some instances, collaboration with another company could be the only realistic way of preventing adverse impacts at the level of indirect business relationships, in particular, where the indirect business partner is not ready to enter into a contract with the company.
Note: This is the final text of the Corporate Sustainability Due Diligence Directive (CSDDD), published in the Official Journal of the European Union in July 2024.