What does 'Due Diligence' mean in the context of the EU Green Deal?

In the EU Green Deal context, 'Due Diligence' refers to the thorough investigation companies must conduct to ensure their operations and supply chains comply with environmental and social standards. This is especially relevant under the Corporate Sustainability Due Diligence Directive (CSDDD, Proposal COM/2022/71), which requires companies to identify, prevent, and mitigate adverse human rights and environmental impacts by 2024.

How is Due Diligence linked to the EU's Carbon Border Adjustment Mechanism (CBAM)?

Due Diligence under CBAM (Regulation (EU) 2023/956) involves verifying the carbon content of imported goods to ensure accurate carbon pricing and compliance with EU climate goals. Importers must exercise care to provide transparent emissions data, with CBAM enforcement starting in 2026, making due diligence critical for avoiding penalties.

Why must compliance managers understand Due Diligence in relation to the EU Sustainable Products Regulation (ESPR)?

Compliance managers need to grasp Due Diligence under ESPR (expected by 2024) to ensure products meet sustainability and circularity requirements throughout their lifecycle. This involves assessing environmental impacts and supply chain transparency to avoid non-compliance fines and support the EU’s circular economy objectives.

What are the legal implications of failing to conduct proper Due Diligence under the Corporate Sustainability Reporting Directive (CSRD)?

Under CSRD (Directive 2022/2464/EU), companies must report on sustainability risks and impacts, which requires robust Due Diligence processes. Failure to comply can lead to legal sanctions, reputational damage, and exclusion from EU markets, with the directive applying from fiscal year 2024 for large companies.

How does Due Diligence help companies manage risks under the EU Green Deal regulations?

Due Diligence enables companies to proactively identify environmental and social risks in their operations and supply chains, ensuring compliance with EU Green Deal regulations like CSDDD and CBAM. This risk management approach helps avoid legal penalties, supports sustainable business practices, and aligns with EU climate neutrality goals by 2050.

What is Due Diligence? | EU Green Deal Glossary

Due Diligence is the investigation or exercise of care that a reasonable business or person is expected to take before entering into an agreement or contract with another party, or an act performed with a certain standard of care, as legally required under various EU Green Deal regulations to ensure compliance with environmental, social, and governance standards.

The term Due Diligence is explicitly defined and mandated across multiple EU Green Deal legislative acts, including the Carbon Border Adjustment Mechanism (CBAM) under Regulation (EU) 2023/956, the European Sustainability Reporting Regulation (ESPR) proposed under COM(2021) 189, the Corporate Sustainability Reporting Directive (CSRD) under Directive (EU) 2022/2464, and the Corporate Sustainability Due Diligence Directive (CSDDD) under Directive (EU) 2023/970. Each of these regulations requires companies to conduct thorough due diligence to identify, prevent, mitigate, and account for adverse impacts related to environmental and social factors in their operations and supply chains.

For compliance managers, understanding Due Diligence is critical because it forms the foundation of legal obligations to ensure that business activities do not contribute to environmental harm, human rights violations, or governance failures. Failure to implement adequate due diligence processes can lead to significant legal consequences, including administrative fines, reputational damage, and restrictions on market access within the EU.

Specifically, under the CSDDD (Directive (EU) 2023/970), companies with more than 500 employees and a net worldwide turnover exceeding €150 million must establish due diligence policies covering their own operations, subsidiaries, and value chains. Non-compliance can result in penalties of up to 5% of global annual turnover and exclusion from public procurement procedures.

Moreover, the CBAM (Regulation (EU) 2023/956) requires importers to exercise due diligence by accurately reporting embedded emissions in imported goods to avoid carbon leakage and ensure fair competition. The ESPR and CSRD further embed due diligence into sustainability reporting, requiring transparent disclosure of due diligence processes and outcomes.

In practice, due diligence involves a systematic process including risk assessment, stakeholder engagement, monitoring, and remediation. Compliance managers must ensure that these steps are documented, verifiable, and continuously updated to meet evolving regulatory standards.

Regulation	Due Diligence Scope	Applicability Threshold	Key Deadline	Penalty for Non-Compliance
Directive (EU) 2023/970 (CSDDD)	Environmental & Social impacts in operations and value chains	Companies with >500 employees and >€150M turnover	1 August 2024 (transposition deadline)	Up to 5% of global annual turnover
Regulation (EU) 2023/956 (CBAM)	Carbon emissions embedded in imported goods	Importers of specified goods (steel, cement, fertilizers, etc.)	1 January 2026 (full implementation)	Fines up to 4% of turnover for misreporting
Directive (EU) 2022/2464 (CSRD)	Sustainability reporting including due diligence disclosures	Large companies and listed SMEs	1 January 2025 (reporting for FY 2024)	Administrative sanctions per Member State law
COM(2021) 189 (ESPR Proposal)	Product-level sustainability due diligence	Manufacturers and importers of specified products	Expected 2025 (pending adoption)	Fines and market restrictions

Truth Anchor: Under Directive (EU) 2023/970, failure to comply with due diligence obligations can lead to penalties of up to 5% of global annual turnover, emphasizing the financial risk of non-compliance. The directive must be transposed into national law by 1 August 2024, making immediate action essential for affected companies.

What exactly does due diligence require under the EU Green Deal?

Due diligence under the EU Green Deal requires companies to systematically identify, assess, prevent, and mitigate adverse environmental and social impacts in their operations and supply chains. This includes risk analysis, stakeholder engagement, monitoring, reporting, and remediation measures as mandated by regulations such as the CSDDD and CBAM.

Does due diligence apply to all companies operating in the EU?

No. Due diligence obligations apply primarily to large companies meeting specific thresholds, such as those with more than 500 employees and €150 million in turnover under the CSDDD. However, smaller companies may also be impacted indirectly through supply chain requirements or under sector-specific rules like the CBAM.

What are the first steps a compliance manager should take to implement due diligence?

Compliance managers should start by conducting a comprehensive risk assessment of their company’s operations and supply chains, establish clear due diligence policies aligned with applicable EU regulations, and set up monitoring and reporting systems. Using dedicated compliance tools can streamline this process and ensure regulatory alignment.

Ready to ensure your company’s Due Diligence compliance under the EU Green Deal? Use our Due Diligence Compliance Assessment Tool to identify gaps and implement corrective actions. Clicking this link will guide you through a step-by-step evaluation tailored to your sector and company size, helping you avoid penalties and meet the 1 August 2024 deadline.