A directive guiding companies to take responsibility for the environmental and human rights impacts of their entire supply chain is expected to take effect in Europe soon. The Council of the European Union* and the European Parliament** have reached a provisional agreement on the Corporate Sustainability Due Diligence Directive (CSDDD). Discussions on this directive began when the European Commission*** first proposed it to the Council and Parliament in March 2022. After nearly two years of extensive negotiations, an agreement was reached on December 14. The Council stated that this directive aims to protect the environment and human rights not only within the EU but around the world.
* The Council of the European Union is the upper legislative body of the European Union (EU), representing the governments of each Member State.
** The European Parliament is also a legislative body of the European Union (EU), representing the citizens of each Member State and elected through direct elections.
*** The European Commission is the executive body of the European Union, representing the general interests of Europe and initiating relevant legislation.
Content and Scope of the Directive
Once this due diligence directive takes effect, large companies of a certain size and their subsidiaries and partners will have legal obligations to protect the environment and human rights in their business operations. Notably, the directive includes provisions requiring that corporate business models and strategies align with the Paris Agreement. Companies will also bear responsibility for preventing ecosystem and biodiversity degradation. Regarding human rights, companies will be held accountable for unfair labor practices such as forced labor, child labor, and wage exploitation, as well as worker health protection issues including employee health and occupational safety.
The agreement also clarified the implementation timeline and the scope of companies covered. For EU-based companies, it applies to large enterprises with 500 or more employees and a global net turnover of at least €150 million. For non-EU companies, they will be subject to the directive if their net turnover exceeds €150 million after a three-year grace period from the effective date. Of course, South Korean companies that are subsidiaries or partners of EU-based companies would be included without a grace period.
Legal Binding Force of the Directive
The directive also includes provisions on penalties and civil liability for companies that violate their obligations. Through this agreement, the Council and Parliament announced that they have finalized the scope of the directive, corporate duties, penalty levels, and the rights and prohibitions that companies must respect.
In particular, the Council emphasized that if a company is found to be adversely affecting the environment or human rights through its business partners, and cannot prevent or stop such activities, it must sever business relationships with those partners. If companies violate these guidelines and fail to pay the imposed fines, additional penalties proportional to company turnover (e.g., 5% of revenue) will be levied.
Impact on South Korean Companies
Once the directive is announced, South Korean companies exporting to the EU will need to shoulder not only the workforce and costs required for due diligence but also the costs and personnel needed for potential litigation. According to research by the Industrial Bank of Korea (IBK), export sectors such as textiles, agriculture and fisheries, raw materials, and steel are relatively vulnerable to environmental and human rights issues, falling under ‘high-impact sectors,’ making thorough preparation all the more critical.
Of course, the CSDDD has not yet come into effect. Technical meetings to examine whether there are any loopholes or issues in the agreement, as well as the final adoption process by the Council and Parliament through voting, remain. However, given the provisional agreement between the two institutions, it is highly likely to take effect in the near future. The European Coalition for Corporate Justice (ECCJ), a civil society organization, expects the relevant vote to take place in March of this year.
by Editor N