Sustainability Initiatives and the EU CSDDD

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The European Union’s Corporate Sustainability Due Diligence Directive (CSDDD) of 2024 imposes obligations on large companies and financial institutions, including investors, operating within the EU-- as well as non-EU companies doing business in the EU -- to identify, prevent, and mitigate adverse human rights and environmental impacts in their operations, value chains, and investments. This means that investors and companies must conduct due diligence to ensure that their investments are not contributing to human rights abuses or environmental harm, and they must take appropriate action if they identify any such risks.
 
Paragraph 52 of the EU CSDDD positions independent third-party verification of multistakeholder initiatives, including those with certifications, as an element of a company’s due diligence plan “to the extent that such initiatives are appropriate to support the fulfilment [sic] of the relevant obligations.”[1] Human rights and labor groups had campaigned for the law to contain language explicitly stating that third-party audits alone would be insufficient and for a strict liability regime whereby the social auditors or the certification scheme itself would bear liability for insufficient audits.[2]
 
Article 20 (Accompanying Measures) sets out the importance of their independence and human rights competencies:

Independent third-party verifiers shall act with objectivity and complete independence from the company, be free from any conflicts of interest, remain free from external influence, whether direct or indirect, and shall refrain from any action incompatible with their independence. Depending on the nature of the adverse impact, they shall have experience and competence in environmental or human rights matters and shall be accountable for the quality and reliability of the verification they carry out.[3]

These requisite qualities of independent third-party verification, which appear again in Article 3 (Definitions), are addressed in this tool.
 
 Notably, the Directive indicates that further EU guidance is forthcoming: Clause 52 directs the Commission together with Member States to issue guidance “setting out fitness criteria and a methodology for companies to assess the fitness of third-party verifiers” to “address the shortcomings of ineffective audits.” It also stipulates that companies are subject to liability for breaches of the law regardless of whether they use these initiatives.

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[1] European Parliament, Legislative Resolution of 24 April 2024 on the Proposal for a Directive of the
European Parliament and of the Council on Corporate Sustainability Due Diligence and Amending Directive (EU) 2019/1937, accessed June 5, 2024, https://www.europarl.europa.eu/doceo/document/TA-9-2024-0329_EN.html.
[2]  “CSOs and labour unions call for the EU to confront systemic flaws of private social auditing and glaring accountability gaps,” Sherpa, September 13, 2021,  https://www.asso-sherpa.org/csos-and-labour-unions-call-for-the-eu-to-confront-systemic-flaws-of-private-social-auditing-and-glaring-accountability-gaps.
[3]  European Parliament, Legislative Resolution of 24 April 2024 on the Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and Amending Directive (EU) 2019/1937.

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