Preparing your contracts for new due diligence requirements

What is the CSDDD?

Corporate Sustainability Due Diligence Directive (CSDDD) holds large companies responsible for breaches of human rights and environmental standards throughout their global value chains. For the first time under this new Directive, large companies are mandated to adopt and action a climate transition plan, ensuring alignment of their business with the 1.5 °C Paris target.

In an effort to achieve legal certainty and maintain sustainable competitiveness, this development represents a significant shift from voluntary frameworks to legally enforceable obligations. Hence, companies need to revisit their climate targets and due diligence processes to protect their business. It will be formally adopted this year, with companies having to comply with the requirements in 2025 or 2026.

Who does the CSDDD cover?

The CSDDD applies to EU and non-EU companies operating in the EU with more than 500 employees and a worldwide annual turnover of more than €150 million. The extraterritorial effect of the Directive addresses sustainability and human rights worldwide and holds these companies to account for their supply chain .

The threshold is lowered for risk sectors like textiles, agriculture and construction, where it applies to companies with over 250 employees and with a turnover of more than €40 million.

How will it be enforced?

  • National supervisory bodies can sanction non-compliant companies up to 5% of the company’s global turnover
  • Victims can also take legal action for damages suffered due to failure to conduct adequate due diligence

What do affected companies need to do?

  • Integrate due diligence into their policies
  • Take measures to:
    • identify and assess adverse human rights and environmental impacts;
    • prevent or mitigate potential adverse impacts; and
    • bring to an end, minimise and remedy actual adverse impacts
  • Establish and maintain a notification mechanism and complaints procedure
  • Monitor the effectiveness of the due diligence policy and measures
    • Ensure everyone in the team is aware of due diligence requirements, from compliance to procurement to ensure it is systematically integrated into companies
    • Ensure the appropriate resources are in place for compliance
    • Evidence compliance
  • Publicly communicate on due diligence

Where do contracts fit in?

Climate contracting supports adherence to the CSDDD because it offers a way to legally mandate contracting parties to report on human rights and environmental impacts and make necessary amends. Below are examples of the types of climate clauses that can be used to make your business CSDDD-compliant.

  • Drew’s DDQ (Climate Change Due Diligence Questionnaire): allows buyers to assess a target’s net zero transition readiness, resilience and ability to adapt to future climate risks.
  • Raphael’s Procurement DDQ (Climate Change Due Diligence Questionnaire for Suppliers): A due diligence questionnaire that asks potential suppliers to provide information regarding a wide range of climate change-related issues going beyond the standard questions.
  • Gordon’s DDQ (Capital Markets ESG Due Diligence Questionnaire): A capital markets focused due diligence questionnaire (DDQ) requiring the company to provide information regarding its impact on and considerations of climate change issues for the present and future.
  • Lola & Harry’s DDQ (Climate Change Due Diligence Questionnaire): A due diligence questionnaire which asks the target company to provide information regarding a wide range of climate change-related issues going far beyond the standard compliance-focused questions.
  • Ayshe’s Clause (Transparent Sourcing of Greener, Fairer Renewable Energy): A clause obliging stakeholders in renewable energy technology supply chains to lower their carbon emissions, minimise their environmental impact and safeguard against modern slavery.
  • Griff’s Clause (Template Board Paper for Significant Contracts/ Transactions): Template drafting for board papers with detailed prompts for consideration of the climate impacts of a significant contract/ transaction and the associated climate risks to the business.
  • Austen’s Clause (Sustainability Clauses in Supply Chain Contracts): Using supply chain contracts to extend positive climate change measures adopted in one country to contracting parties in other countries that may have less of a legislative focus on climate.

See the full suite of clauses here