On July 25, 2024, the European Union implemented Directive 2024/1760 to promote sustainable and responsible corporate practices across global value chains. Known as the Corporate Sustainability Due Diligence Directive, its aim is to ensure that businesses operate ethically and sustainably, both within the EU and internationally.
This directive highlights the growing emphasis in the global economy on Environmental, Social, and Governance (ESG) issues. Businesses are being called upon to adopt strategic plans that reduce negative impacts and promote positive change across human rights and environmental fronts.
Key Objectives of the Directive
The directive addresses critical challenges related to global supply chains, human rights, and environmental degradation. It obligates companies to assess and mitigate any adverse effects their operations may have. This includes both their own activities and those of their subsidiaries and supply chain partners.
Large corporations must also align their practices with the 2050 Paris Agreement climate goals. They are required to adopt and implement transition plans that support the EU’s commitment to climate neutrality and meet intermediate climate targets.
Corporate Obligations Under the Directive
Companies must now establish robust due diligence processes. These should identify potential risks, prevent and mitigate negative impacts, and regularly evaluate the effectiveness of their actions. Reporting these efforts publicly is also essential for transparency and accountability. Moreover, the directive places a legal responsibility on companies to ensure their value chains adhere to these standards. This encompasses all tiers of their operations—from raw material sourcing to final product delivery.
Why Is the EU Promoting Sustainable Corporate Behavior?
The directive aims to support the EU’s transition toward a sustainable, fair, and competitive economy, with businesses playing a pivotal role. Strong support from civil society, EU citizens, and trade associations has fueled the directive’s development.
More than 700 responses to a public consultation reflected a clear demand for mandatory sustainability standards. While many companies are aware of their social and environmental responsibilities, voluntary actions have proven insufficient. Disparate national laws and the complexity of global supply chains have hindered meaningful progress.
Therefore, a unified legal approach was needed to ensure that all businesses operating within the EU single market follow the same rules. This levels the playing field and helps companies more easily comply with their responsibilities, while boosting innovation and long-term competitiveness.
Current Challenges and the Need for a Common Legal Framework
The lack of consistent legal frameworks across EU member states has slowed down the adoption of sustainable practices. Businesses struggle to obtain reliable data from their supply chain partners, particularly in regions where regulations are weaker. With no harmonized set of rules, good practices are not widely adopted, and some companies gain unfair advantages by avoiding responsibility. The new directive eliminates these discrepancies by offering a clear, enforceable EU-wide framework. It also promotes international competitiveness, encourages innovation, and ensures legal certainty. By doing so, it transforms due diligence from a voluntary gesture into a binding standard, driving global corporate behavior toward responsibility and sustainability.
What Should Companies in Developing Countries Like Nepal Do?
To align with the new directive and remain competitive, companies in countries like Nepal should:
- Invest in sustainable value chains that protect human rights and the environment.
- Improve capacity-building initiatives by training staff and adapting to international standards.
- Participate in global supply chains that prioritize ethical sourcing and fair labor practices.
- Collaborate with EU partners to ensure compliance with sustainability expectations.
- Upgrade production systems and documentation to ensure traceability and transparency.
Estimated Costs and Corporate Responsibilities
Under the directive, companies will be responsible for the following:
- Paying a fair minimum wage to workers throughout the supply chain.
- Establishing due diligence mechanisms, including risk assessment and mitigation processes.
- Covering operational costs related to compliance, reporting, and training.
- Managing transition expenses related to the redesign of value chains or production strategies.
- Making investments in sustainable practices and systems to optimize operations.
How Does This Rule Apply?
Administrative Supervision
The implementation of corporate sustainability due diligence will be overseen by designated authorities within each EU Member State. These authorities will be responsible for supervising and enforcing compliance with the directive. Their powers will include issuing injunction orders and imposing effective, proportionate, and dissuasive penalties, including substantial fines where necessary.
At the European level, the European Commission will establish a supervisory network that brings together representatives from national supervisory bodies. This network will ensure a coordinated and consistent approach to enforcement across all EU Member States.
Civil Responsibility
Member States are also required to ensure civil liability mechanisms are in place. This means that if a company intentionally or negligently fails to fulfill its due diligence obligations, victims who suffer harm as a result must be granted the right to seek compensation. This provision strengthens accountability and offers protection for affected individuals or communities.
A critical question arises: if companies have long been encouraged to voluntarily address human rights and environmental impacts, why were those actions not sufficient?
Corporate Sustainability Due Diligence in the EU
Many companies within the European Union are already conducting some form of corporate sustainability due diligence. For example, a 2020 study found that one-third of respondents across various regions reported their companies are working to respect all human rights and take environmental impacts into account as part of their operational strategies.
When Does This Rule Apply?
The directive on corporate sustainability due diligence was officially adopted by the European Union on July 5, 2024, and published in its official journal. EU Member States are required to transpose this directive into national law by July 26, 2026. Following this, the rules will begin to apply from July 26, 2027, in three separate phases:
3-Year Implementation Period (From July 26, 2027):
- Applies to EU companies with more than 5,000 employees and an annual net turnover of over €1.5 billion, and non-EU companies with a turnover of over €500 million in the EU.
4-Year Implementation Period (From July 26, 2028):
- Applies to EU companies with over 3,000 employees and €900 million in annual turnover, and non-EU companies with €900 million in EU turnover.
5-Year Implementation Period (From July 26, 2029):
- Applies to all remaining companies that fall within the scope of the directive.
Impact on Small and Medium-Sized Enterprises (SMEs)
Although SMEs are not directly covered by the directive, many will still feel its impact, particularly when they are part of the supply chains of larger companies. These smaller businesses may be asked to assess and report on actual or potential human rights or environmental impacts, or to modify operations in line with the compliance obligations of their larger business partners.
To protect these businesses and reduce potential burdens, the directive includes built-in safeguards. Large companies are expected to avoid harmful purchasing practices and may be required to offer both financial and non-financial support to smaller suppliers. The directive also encourages capacity-building efforts, such as providing SMEs with practical tools, expert guidance, and training to help them implement sustainability practices effectively and independently.
Do These Rules Treat Non-EU Companies (e.g., Nepal) Differently?
No, they do not. The obligations set out in the directive apply equally to both EU and non-EU companies. Whether the topic is due diligence or climate transition planning, the expectations remain consistent for all companies operating within the EU market. This ensures a level playing field and a uniform legal framework for businesses regardless of where they are headquartered.
Which Human Rights Are Covered?
The directive is grounded in internationally recognized human rights and labor standards. It draws heavily on conventions established by the United Nations and the International Labour Organization (ILO), as well as the United Nations Guiding Principles on Business and Human Rights (UNGPs).
Examples of human rights addressed by the directive include:
- The right to life
- The prohibition of child labor
- The right to fair and safe working conditions
These provisions are designed to ensure that companies act responsibly throughout their global value chains, respecting not only legal obligations but also the fundamental dignity and well-being of individuals and communities.
