The Corporate Sustainability Due Diligence Directive's Effects on Turkish Companies and EU Partnerships: A Detailed Synopsis

A provisional agreement on the new Corporate Sustainability Due Diligence Directive ("CSDDD") was agreed by the EU institutions in December 2023. Due diligence requirements for current and prospective negative effects on human rights and the environment in their supply chains will be imposed on major EU and non-EU companies by this directive.[1] The draft is currently pending formal approval by EU institutions and publishing in the EU Official Journal, marking the end of the legislative process.[2]

Concerning corporate sustainability due diligence, another recent EU’s legislative initiatives consist of the EU Conflict Minerals Regulation, the EU Batteries Regulation, the EU Deforestation Regulation, the EU Corporate Sustainability Reporting Directive (CSRD), and the soon-to-be EU Forced Labor Products Ban Regulation.[3]

Companies Subject to Direct Obligations under the CSDDD

Both major EU and non-EU enterprises will be subject to the CSDDD regulations. But distinct benchmarks will be applied to companies in the EU and those outside the EU.

Based on their size, economic strength, and industry influence, enterprises in the European Union (EU) are divided into two main groups. Group 1 consists of all EU limited liability companies that are at least 500 employees and have a global net revenue of more than EUR 150 million. These enterprises are of significant size and economic importance. Certain rules that are meant to guarantee adherence to certain criteria apply to this group. Group 2 consists of additional limited liability businesses that are involved in specific high-impact industries. These companies do not meet Group 1's requirements for employees or turnover, but they are nevertheless quite prominent in the industry with more than 250 employees and a net turnover of EUR 40 million globally. Notably, Group 2 entities' regulations will take effect two years after Group 1 entities' regulations do.[4]

Apart from the aforementioned EU categories, non-EU enterprises operating in the EU may be subject to certain restrictions provided that their turnover falls between the criteria designated for Group 1 and Group 2 corporations. These non-EU companies who operate in the EU and make significant revenue are subject to regulatory frameworks that are similar to those that apply to their EU equivalents. This strategy guarantees an all-encompassing and just regulatory framework that promotes accountability and transparency among businesses, irrespective of their place of origin.[5]

Companies Subject to Indirect Obligations under the CSDDD

In addition to the operations of the in-scope enterprises, the direct and indirect business partners in the chain of activities will also be subject to the due diligence duties. Companies that fall under the scope of this regulation must make sure that their due diligence policies cover both their upstream business partners who produce goods or provide services and their downstream business partners who engage in activities like product distribution, transportation, storage, and disposal with the exception of consumer disposal and downstream activities that are subject to export control. Therefore, in reality, a large number of companies, regardless of their size or turnover, that are a part of the chain of operations of businesses that fall under the purview of the CSDDD duties will be impacted inadvertently.[6]

A Sector-Wide Analysis of Applicability of the CSDDD

The reach of the CSDDD is extensive. With a few notable exceptions in the financial industry, it will span businesses across nearly every industry. To be more precise, pension plans running social security systems in accordance with relevant EU law, alternative investment funds (AIFs), and undertakings for collective investment in transferable securities (UCITS) are exempt from the CSDDD.[7]

In order to guarantee that the company's business model and strategy are compatible with transitioning to a more sustainable economy and with the Paris Agreement's aim of limiting global warming to 1.5 °C, the CSDDD also imposes an obligation on in-scope companies to implement and adhere to a strategy to transition for climate change mitigation initiatives.[8]

Impact on Turkish Companies

It is expected that companies that are based in Turkey and that are involved, directly or indirectly, in EU activities will be subject to specific obligations under the CSDDD. Each company must evaluate its unique circumstances to determine if these requirements are directly the duty of a Turkey-based company or if they are an extension of the obligations of a business situated in the EU or a third country. The scope and methods of implementation of these duties, as well as the means by which member states will harmonize and establish standards, are currently the topics of discussion among EU politicians and experts. There is enough information accessible to predict that companies with Turkish headquarters may face specific duties under the Directive.[9]

Turkey's major export partner is the EU, which is mostly dependent on the automobile, iron and steel, textile, chemical, and agricultural industries. Consequently, business partners in the EU are likely to anticipate complete disclosure on the environmental and human rights influences associated with the conduct of Turkish subsidiaries, regardless of their volume, even though the variety of domestic subsidiaries directly liable for obligations may be restricted owing to the comprehensive structure of the CSDDD that covers the whole value chain.[10]

In conclusion, member state-designated competent authorities will not have the authority to bring direct administrative or judicial actions against Turkish-based companies that fail to comply with the scope of their duties. In order to fulfill its own obligations, a company that is based in the EU or a third country that falls under the purview of this directive may ask its Turkish business partner for all the information and documentation that are required by the Directive. The final good or service will be taken into account after this Directive is put into effect, including all steps involved. Companies that have fewer negative effects on the environment and human rights during the whole process will have a distinct advantage.