As sustainability regulations expand worldwide, organisations are increasingly facing tougher obligations regarding their ESG reporting practices.
The latest in this wave of legislation is the Corporate Sustainability Due Diligence Directive (CSDDD). Approved by the EU Council in May 2024, the CSDDD is set to have a large impact on companies in the European Union and beyond.
Here’s a breakdown of exactly what the CSDDD is and what it could mean for your organisation.
What is the CSDDD?
The CSDDD is a new directive that places due diligence obligations on large companies operating in the EU. These obligations relate to actual and potential negative impacts companies might have on human rights and the environment. It may apply to a company’s own operations, as well as the operations of its subsidiaries, business partners and supply chains. This means it will affect both upstream and downstream activities.
The CSDDD was adopted by the EU Council on May 24th 2024, after a lengthy legislative process. It was then published on July 5th, and entered into force on July 25th. Each EU Member State will now have two years to transpose the rules of the CSDDD into their own national laws.
The directive does also contain built-in mechanisms for the EU Commission to review and make changes after it has come into force. This means that companies need to be aware that there could be additional changes and requirements in the future.
With their similar sounding acronyms, companies might be wondering what the difference between the CSDDD and the Corporate Sustainability Reporting Directive, or CSRD, is. In fact, the CSDDD is designed to work alongside the CSRD.
While the CSDDD focuses on due diligence and taking responsibility, the CSRD establishes sustainability-related reporting guidelines and focuses on transparency and disclosure. The CSRD also applies to significantly more companies than the CSDDD.
What is the purpose of the CSDDD?
The purpose of the CSDDD is to enhance the protection of human rights and the environment. It is designed to impose responsibilities onto companies to identify, prevent, and minimise the actual and potential adverse impacts resulting from their operations.
This has a dual benefit of both tackling negative impacts on communities, people and the planet, while also encouraging companies to mitigate risks that come from their supply chains.
The CSDDD also aims to standardise due diligence regulations across the EU. The directive seeks to bring a unified legal framework for due diligence practices in Europe, minimising legal uncertainty.
The main due diligence requirements of the CSDDD set out that companies should:
- Integrate due diligence into their policies, operations, and contracts.
- Work to identify actual and potential adverse impacts.
- Make efforts to prevent and mitigate both actual and potential adverse impacts.
- Make improvements to any business plans to comply with the new directive.
- Make related investments towards furthering these aims.
- Monitor the effectiveness of due diligence processes.
- Establish a notification and complaints procedure.
- Adopt transition plans with time-limited targets, in order to make operations compatible with the Paris Agreement.
What are ‘adverse impacts’?
‘Adverse impacts’ refers to the harmful impacts on the environment or human rights as listed by the CSDDD. Adverse human rights impacts mean negative effects on a person’s right to life, to freedom and security, and the right to favourable conditions of work. Adverse environmental impacts include any actions that cause measurable environmental destruction, such as water or air pollution, harmful emissions or deforestation.
Who will the CSDDD impact?
The CSDDD requires companies within its scope to integrate due diligence into all levels of their operations. Although the CSDDD only focuses on larger companies, many small and medium-sized businesses might be affected within the ‘chain of activities’ of larger companies.
The directive applies to companies that meet the following criteria:
- EU Companies with more than 1,000 employees and a net worldwide turnover of more than EUR 450 million.
- Non-EU Companies with a turnover generated in the EU of more than EUR 450 million.
The CSDDD will be implemented in stages, with companies having different timelines to comply based on their size and turnover:
- Companies with over 5,000 employees and a turnover of EUR 1.5 billion will need to comply by 2027.
- Companies with over 3,000 employees and a turnover of EUR 900 million turnover will need to comply by 2028.
- Companies with over 1,000 employees and a turnover of EUR 450 million turnover will need to comply by 2029.
The CSDDD will be enforced through administrative supervision and civil liability.
At the state level, EU Member States will designate authorities to supervise and impose sanctions, including fines and compliance orders.
At the European level, a network of supervisory authorities will ensure coordinated enforcement. Those who are harmed by non-compliant companies will have the right to compensation for damages.
Even businesses not directly subject to the CSDDD may be affected if they have business partners bound by the directive, as they may be required to terminate relationships with partners that have adverse environmental or human rights impacts that cannot be mitigated.
What are the benefits of the CSDDD?
The directive is contributing to the transition to a sustainable economy, in which businesses play a key role. There have been calls for mandatory due diligence rules, and the CSDDD provides a harmonised legal framework.
It will steer companies towards responsible behaviour, and it ensures that companies addressing sustainability impacts have the legal certainty to make the necessary improvements.
For people, the CSDDD means:
- Better protection of human rights, including labour rights.
- Healthier environment for present and future generations.
- Increased trust in businesses.
- More transparency, which enables informed choices.
- Better access to justice for victims.
For companies, the CSDDD means:
- Unified legal framework in the EU, creating legal certainty and a level playing field.
- Greater customer trust and employee commitment.
- Better awareness of companies’ negative human rights and environmental impacts.
- Better risk management and more resilience.
- Better protection of human rights and the environment.
- Sustainable investment, capacity building and support for value chain companies.
- Improved sustainability-related practices.
How can you prepare for the CSDDD?
With the CSDDD coming into force, many companies are wondering what their next steps should be. First and foremost, companies should determine whether they are in the scope of the directive. Then, they need to identify the relevant timeline for the organisation for compliance.
After confirming this, companies need to investigate and gather data on their own operations, as well as the operations of their supply chains and business partners. They then need to conduct a gap analysis of current policies and practices, and identify any areas that need to be improved upon in order to comply with the CSDDD. The next part of this preparation should be to assess the need for any resources, be it human, financial or technical, to implement the necessary due diligence process.
The due diligence process should focus on the following key elements:
- Assessment of the companies actual or potential adverse impacts on human rights and the environment, including the impacts of any business relationships as well.
- Identification of appropriate measures to prevent and mitigate the adverse impacts that have been identified and assessed.
- Establishment of tools to monitor and confirm the effectiveness of the measures taken.
- Communication of the due diligence process and its outcomes, reported on both internally and externally.
The EU Commission is anticipated to release overall recommendations for meeting the due diligence standards of the CSDDD in the near future.
Convene ESG
With the introduction of the CSDDD, and its potential impact on companies, it is crucial that organisations have the capability to manage their ESG practices, processes and reports.
Now more than ever, companies should consider leveraging reporting software. This kind of software can save resources they would have spent on manual data collection, input, and analysis.
Creating accurate ESG reports poses a significant hurdle for numerous organisations.It’s why it’s important to have the right ESG reporting software for your company; to help navigate the developing landscape of ESG regulations.
Convene ESG allows you to do just this by providing an end-to-end platform to collect data, track progress, compare with peers, align with frameworks and produce ESG reports.
With Convene ESG, you can collect your data for all the necessary metrics in the CSRD legislation, ensuring that you are compliant with regulations. This will allow you to further explore your company’s sustainability strategies, and prepare for reporting under the CSDDD.
