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The European Union's recent Sustainability Due Diligence Directive marks a crucial milestone in the regulation of business practices, seeking to ensure that companies take responsibility for their environmental and social impacts.
Corporate Sustainability Due Diligence Directive
This directive requires companies to identify, prevent and mitigate the adverse effects of their operations on the environment and human rights, establishing a regulatory framework that significantly affects the real estate sector.
How does this directive affect the property sector?
The real estate sector, traditionally characterised by its significant environmental impact, is at a crossroads. The implementation of this directive implies a transformation in the way real estate assets are developed, built and managed. Companies in the sector They must adopt sustainable construction practices, implement efficient energy management systems, and ensure that their supply chains comply with the most rigorous ethical and environmental standards.
One of the most critical aspects of this environmental due diligence is the obligation of transparency and reporting. Real estate companies must provide detailed information about their sustainability efforts, from the use of eco-friendly materials to the reduction of their carbon footprint. This not only improves corporate image, but also builds trust among investors and customers, who increasingly value sustainable practices.
The directive also encourages innovation in the sector. Companies will be motivated to invest in green technologies and innovative solutions that reduce the environmental impact of their projects. From the use of renewable energy in construction to the creation of smart buildings that optimise the use of resources, compliance with this regulation can be a catalyst for progress and long-term sustainability.
The Sustainability Due Diligence Directive represents a significant change in the way companies manage their supply chains, imposing extended responsibility to ensure sustainable and ethical practices throughout the entire chain. This regulation not only seeks to protect human rights and the environment, but also promotes fair competition and innovation in sustainable practices.
Who does the CSDDD affect in real estate?
The Corporate Sustainability Due Diligence Directive (CSDDD) primarily focuses on large companies, However, it can also affect the small and medium-sized enterprises (SMEs) in the real estate sector indirectly. This is due to several interrelated reasons that have a significant impact on these smaller companies.
The legislation will be implemented progressively and in stages depending on the size of the company. In terms of scope, the due diligence rules will apply to:
EU companies:
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- 2027: Companies with more than 5,000 employees and €1.5 billion in turnover.
- 2028: Companies with more than 3,000 employees and €900 million in turnover.
- 2029: Companies with more than 1,000 employees and €450 million in turnover.
Companies outside the EU operating in the EU:
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- 2027: Companies with a turnover of more than €1.5 billion.
- 2028: Companies with a turnover of more than €900 million.
- 2029: Companies with a turnover of more than €450 million.
For SMEs, although they are not directly included in the proposal, will be affected as part of the supply chain.
First, although SMEs are not directly bound by the CSDDD, they may be affected as part of the “supply chain of large companies”. Large companies subject to the CSDDD have a responsibility to conduct due diligence in their operations and value chains, which includes their suppliers and business partners. Therefore, large companies may require the SMEs they work with to comply with certain sustainability and human rights standards in order to maintain their business relationship. This may include audits, verifications, and the implementation of specific policies by SMEs to align with the requirements of their larger customers.
Second, the “exclusion from public contracts” for companies that do not comply with the CSDDD may affect SMEs. If an SME wishes to participate in public contracts, it may need to demonstrate that it complies with sustainability standards which, although not directly required by the CSDDD, are required by the public contract award criteria established by the authorities. This means that SMEs must adopt sustainable practices and ensure that their operations do not have significant negative impacts on human rights or the environment.
Third, growing “demand for sustainability from investors and consumers” may pressure SMEs in the real estate sector to adopt sustainable practices. Investors and consumers are increasingly interested in supporting companies that demonstrate a commitment to sustainability. SMEs may therefore need to adopt and report on sustainable practices in order to attract investment and maintain customer loyalty, thereby aligning themselves with market expectations that are in tune with the objectives of the CSDDD.
Finally, SMEs can benefit from the “innovation and continuous improvement” promoted by the CSDDD. By adopting sustainable practices, SMEs can improve their operational efficiency, reduce long-term costs, and access new market opportunities. The adoption of green technologies and the implementation of efficient environmental management systems can result in significant competitive advantages, helping SMEs to thrive in an increasingly sustainability-oriented business environment.
In summary, although SMEs in the real estate sector are not directly bound by the CSDDD, they are influenced by the demands of their business partners, public procurement criteria and market expectations. Adapting to these changes not only enables them to comply with legal and market demands, but also gives them a competitive advantage in the transition to a more sustainable future.
Penalties for non-compliance with the CSDDD
The Corporate Sustainability Due Diligence Directive (CSDDD) establishes a rigorous set of penalties for companies that fail to comply with their obligations. The most significant penalties include: administrative fines, which can be up to 51% of the company's global turnover. These fines are imposed to ensure that companies take appropriate measures to identify, prevent and mitigate adverse impacts on human rights and the environment.
In addition to fines, the CSDDD introduces a system of civil liability which allows victims of damage caused by a company's failure to exercise due diligence to claim compensation. This means that companies may face legal action and be required to compensate parties affected by their actions or omissions. Claims may be brought by a variety of stakeholders, including trade unions and civil society organisations, and must be filed within five years.
Another relevant sanction is the exclusion from public contracts. Companies that fail to comply with the CSDDD obligations may be disqualified from participating in tenders for public contracts and concessions. This measure is designed to encourage compliance and ensure that only companies that meet sustainability and human rights standards have access to business opportunities with the public sector.
Finally, the national supervisory authorities have the power to issue corrective orders companies, requiring them to adopt specific measures to correct any identified non-compliance. These orders may include implementing changes to due diligence policies and procedures, as well as conducting audits and verifications to ensure that companies are fulfilling their duties. This integrated approach to sanctions and corrective measures seeks to strengthen corporate accountability and ensure that companies operate in a sustainable manner that respects human rights.
What is the relationship between the CSDDD and the CSRD?
The Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD) are two key European Union regulations that work together to promote responsible and sustainable business practices. Although each has its own particular focus, together they provide a comprehensive framework for improving corporate sustainability and transparency.
The connection between the CSRD and the CSDDD lies in their complementary objectives and the need for consistency in sustainability reporting and management. Companies that are subject to both directives will need to integrate the due diligence information from the CSDDD into their sustainability reports under the CSRD. This means that the risks identified, the measures taken to mitigate them, and the results of these actions will be reported as part of the overall sustainability report. This integrated approach not only increases transparency, but also allows companies to effectively demonstrate their commitment to sustainability.
The CSRD aims to improve the quality and consistency of sustainability reports submitted by companies. This directive requires companies to disclose detailed information about their environmental, social and governance (ESG) practices, which must be verified by independent auditors or firms. This reporting covers everything from carbon emissions to human rights policies and labour practices. By standardising these reports, the CSRD ensures that stakeholders, including investors and consumers, have access to reliable and comparable information on companies' sustainability performance.
On the other hand, the CSDDD establishes specific due diligence obligations for companies to identify, prevent, mitigate and account for adverse impacts on human rights and the environment throughout their operations and supply chains. This includes conducting risk assessments, implementing corrective measures and maintaining accessible grievance mechanisms. Companies must integrate these due diligence processes into their corporate policies and ensure that their business partners also comply with these standards.
Both directives encourage the use of international standards for reporting and due diligence, such as the Global Reporting Initiative (GRI) standards and the principles of the United Nations Global Compact. In addition, the implementation of these directives will be supervised by designated authorities in each Member State, ensuring that companies comply with their obligations and taking corrective measures in the event of non-compliance.
In summary, the CSRD and the CSDDD are fundamental pillars of the EU's strategy to promote a more sustainable and fairer economy. While the CSRD focuses on improving the transparency and quality of sustainability reporting, the CSDDD ensures that companies adopt proactive risk management practices to mitigate negative impacts on human rights and the environment. Together, these directives strengthen corporate responsibility and foster a holistic approach to corporate sustainability.
How we can help you prepare at GESVALT
From GESVALT We believe that the first step is to conduct a comprehensive assessment of the company's current practices in terms of sustainability and due diligence. This includes analysing existing policies, operational processes and supply chains. It identifies areas where the company already complies with regulations and those that require improvement. This initial diagnosis is essential for developing an effective and tailored action plan.
The next steps will be to help companies develop or update their sustainability policies and procedures to align with the requirements of the CSDDD. This may include creating specific human rights, environmental, and governance policies. Ensure that these policies are clear, enforceable, and effectively communicated to all levels of the organisation and throughout the supply chain.
In conclusion, the Sustainability Due Diligence Directive represents an essential change for the real estate sector. Not only does it impose regulatory challenges, but it also opens a window of opportunity for companies to take a proactive approach to sustainability. By integrating these practices, the sector will not only contribute to a greener and more equitable future, but will also position itself as a leader in the transition to a more sustainable world.
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