The Corporate Sustainability Due Diligence Directive: accountability and opportunity are knocking!

Sustainability Mandates: CSRD vs. CSDDD

In today’s corporate landscape, sustainability has emerged as a fundamental aspect of business operations. You can’t dodge the ‘bullet’ since the increasing societal and investor expectations for responsible business. Companies are under pressure to integrate sustainability into their strategies and operations, and if not (enough), face lawsuits (Shell, ING e.g.). This all whilst sustainable goals currently are being revised (e.g. Unilever, Shell) and not in the way one would expect based on external pressure.

Nowadays you hear and read a lot about the Corporate Sustainability Reporting Directive (CSRD) but not so much about the Corporate Sustainability Due Diligence Directive (CSDDD). Which has prominence as a guiding framework for assessing and managing sustainability risks and opportunities within organizations.

Civil Liability and fines up to 5% of turn-over

On April 24th, 2024, the CSDDD legislation was passed by the European Parliament making companies civil liable for ‘damages’ occurring from non-compliance, with fines up to 5% of annual turnover. However, companies cannot be held liable (yet) for any damage caused by its business partners in its chain of activities.

Furthermore the ‘directive’ proposes that member states designate supervisory authorities to monitor compliance, similar to existing financial regulations. According to the CSDDD, the supervisory authorities will be given extensive powers. This includes the right to require companies to provide information and conduct investigations, even without prior notice. They can also issue specific orders and take interim measures to address serious risks. The supervisory authorities will monitor companies for compliance with all CSDDD obligations, including insider risk management, human rights, and environmental responsibility. One focus is on auditing companies to see if they have adopted a climate transition plan, with specific targets based on scientific evidence.

What is CSDDD, also referred to as CS3D?

Well, CSDDD is a comprehensive framework designed to help companies conduct thorough assessments of their sustainability performance and impacts. It provides guidelines and best practices for integrating sustainability considerations into various aspects of business operations, including supply chain management, corporate governance, environmental stewardship, and social responsibility.

Summarized, CSDDD is about what you do as a company (you have a performance obligation) regarding sustainability instead of CSRD what’s all about reporting on it.

CSDDD Scope

CSDDD will apply to companies and parent companies within the European Union (EU) with more than 1,000 employees and a worldwide turnover of more than 450 million euros, and to franchises with a worldwide turnover of more than 80 million euros, if at least 22.5 million euros of that comes from royalties. The rules will also apply to companies, parent companies and franchises from outside the EU, which achieve the same turnover threshold within the EU. The new rules will come into force gradually:

• From 2027: Companies with >5000 employees and >€1.5 billion turnover
• From 2028: Companies with >3000 employees and >€900 million turnover
• From 2029: Companies with >1000 employees and >€450 million turnover

Key Components of CSDDD

CSDDD consists of four key components:

• Risk Identification and Assessment: CSDDD emphasizes the identification and assessment of sustainability risks across the value chain. This includes evaluating environmental risks, such as carbon emissions and resource depletion, as well as social risks related to labor practices, human rights, and community relations.
• Stakeholder Engagement: Effective stakeholder engagement is a central aspect of CSDDD. Companies are encouraged to engage with stakeholders, including employees, customers, suppliers, investors, and local communities, to understand their expectations and concerns regarding sustainability issues.
• Transparency and Reporting: CSDDD promotes transparency and disclosure of sustainability performance through comprehensive reporting mechanisms. Companies are encouraged to disclose relevant sustainability information, such as environmental impact assessments, social performance indicators, and governance structures, in a transparent and accessible manner.
• Integration into Business Strategy: CSDDD emphasizes the integration of sustainability considerations into corporate strategy and decision-making processes. Companies are encouraged to align sustainability goals with business objectives, identify opportunities for innovation and efficiency, and mitigate risks that may arise from unsustainable practices.

Benefits of CSDDD

Embracing CSDDD can yield numerous benefits for companies, including:

• Enhanced Risk Management: By identifying and addressing sustainability risks proactively, companies can minimize operational disruptions and reputational damage.
• Improved Stakeholder Relations: Engaging with stakeholders and addressing their sustainability concerns can enhance trust and credibility with customers, investors, and other stakeholders.
• Cost Savings and Efficiency Gains: Implementing sustainable practices can lead to cost savings through resource efficiency, waste reduction, and improved operational performance.
• Competitive Advantage: Companies that embrace sustainability can gain a competitive edge by differentiating themselves in the market, attracting socially conscious consumers, and accessing new business opportunities.

Implementing CSDDD

Implementing the Corporate Sustainability Due Diligence Directive requires a systematic approach and commitment from senior leadership. Companies can follow these steps to effectively integrate CSDDD into their operations:

• Commitment from Leadership: Senior management should demonstrate a commitment to sustainability and allocate sufficient resources to support the implementation of CSDDD throughout the organization.
• Assessment of Current Practices: Conduct a thorough assessment of current sustainability practices and performance to identify areas for improvement and prioritize action.
• Integration into Policies and Procedures: Integrate CSDDD principles into corporate policies, procedures, and governance structures to ensure alignment with sustainability objectives.
• Capacity Building and Training: Provide training and capacity-building programs to employees to enhance their understanding of sustainability issues and their role in implementing CSDDD.
• Monitoring and Evaluation: Establish monitoring and evaluation mechanisms to track progress towards sustainability goals and identify opportunities for continuous improvement.

Applying the CSDDD Principles

Although the implementation dates seem far away, in an era marked by increasing scrutiny of corporate behaviour and a growing emphasis on sustainability, CSDDD offers a valuable framework for companies navigating the complex landscape of sustainability risks and opportunities. Not particularly as a compliance exercise, and for those companies in scope, but for every company willing to integrate CSDDD principles into their operations: enhancing resilience, building stakeholder trust, and in the process contributing to a more sustainable future.