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By Adam Lipman, 4 December 2023
Climate change and human rights violations are two of the most complex challenges the world faces today, and the European Union (EU) is taking action to hold companies accountable for their environmental and social impacts. The Corporate Sustainability Due Diligence Directive–also known as the CSDD Directive or CSDDD–is a new piece of legislation that will have far-reaching implications for all companies doing business in the EU as they scramble to meet stringent reporting requirements.
What is the CSDDD?
The CSDDD was adopted as a negotiating text on June 1, 2023. The negotiation period is expected to finish by 2024, and once the proposal is adopted it will be transposed to domestic laws by EU member states within the following two years. The Directive’s broad aim is to promote sustainable and responsible corporate behavior with a rigorous due diligence framework. The Directive requires companies to assess their environmental and social risks both upstream and downstream in their chain of activities, while implementing climate transition plans.
The Directive specifies that companies must identify, prevent, mitigate and account for social and environmental effects of their business–a monumental effort that many companies are not prepared for.
How does the CSDDD differ from CSRD?
There are several similarities between the CSDDD and the Corporate Sustainability Reporting Directive (CSRD) published previously. Both directives are concerned with sustainability, but the CSDDD is targeted toward upscaling supply chain due diligence. The CSRD, on the other hand, is fully focused on sustainability reporting with the aim of increasing transparency from companies that operate in the EU. The two directives are not mutually exclusive, and are intended to be applied in tandem by companies that fall under both scopes.
Who does the CSDDD apply to?
The Directive has an immense reach, with the EU expecting it to impact about 13,000 countries within the EU and around 4,000 elsewhere. The main targets of the Directive are large EU limited liability companies in two specific sub-groups. Group 1 consists of companies with 500 or more employees and €150m+ net turnover. Group 2 consists of companies companies with 250 or more employees and €40m+ net turnover in high-impact sectors like agriculture and textiles. For Group 2, the Directive will come into effect two years after Group 1.
The Directive also covers non-EU companies that generate turnover in the EU that aligns with the same thresholds as EU Groups 1 and 2. While micro-companies and small-to-medium enterprises will not see direct effects from the Directive, they should consider that doing business with bigger companies may be contingent on their ability to meet similar standards.
What does the CSDDD require?
The Directive comes with seven key requirements companies must meet.
- Centering social and sustainability due diligence as a key element in policy development and implementation.
- Identifying the current and potential adverse impacts on the environment and human rights from operations and the operations of all subsidiaries and supply chain partners.
- Actively mitigating the identified risks within the company and its supply chain.
- Creating an action plan and accompanying timeline to address identified risks.
- Establishing formal grievance mechanisms for employees and stakeholders.
- Aligning business model and future strategy with the Paris Agreement’s 1.5°C target.
- Publicly publishing sustainability reports with focus on due diligence.
These demands will put great strain on even the most successful companies as they work to create new frameworks, strategies and reporting capabilities.
What benefits will the CSDDD bring?
Although reaching compliance with the CSDDD will be complex, rising to the challenge will have benefits for multiple parties:
- A unified sustainability and human rights framework with greater legal certainty across the EU.
- Better risk management and adaptability for companies that succeed in meeting requirements.
- Better protection of human rights across the globe.
- A healthier environment.
- More sustainable investment.
How can companies prepare for the CSDDD?
While the details of the requirements are still being negotiated, companies cannot afford to wait until the CSDDD is finalized to start making the necessary changes. There are three steps every company should take to lay the groundwork for CSDDD compliance.
1. Improve visibility: Companies must facilitate more robust data collection, gathering information on operations, suppliers and partners to identify risks and populate sustainability reports.
2. Align with key frameworks: Leaders will need to strategize on how to develop and publish sustainability reports according to CSDDD requirements. One way to do so is to model reports on existing frameworks, including:
a. Carbon Disclosure Project (CDP)
b. Dow Jones Sustainability Indexes (DJSI)
c. Global Reporting Initiative (GRI)
d. Global Real Estate Sustainability Benchmark (GRESB)
e. Sustainability Accounting Standards Board
3 .Expanding human rights due diligence: Many companies have little to no insight into their third party network’s social impacts. While most of the concern about the CSDDD falls on sustainability, the Directive is clear in its requirements for companies to step up third-party due diligence in the human rights arena.
As companies prepare for the CSDDD to come into effect, leaning on technology is one way to efficiently tackle the new burden of reporting without relying on overly complex and inefficient manual processes.
Adam Lipman is Head of Content at Ethixbase360, whose market leading platform is designed to provide a crucial component of an effective CSDDD strategy. It includes features such as the Modern Slavery Questionnaire plus ongoing screening and monitoring of your third-party network, key to unlocking CSDDD compliance and the ability to conduct business in the EU.