Once again, the European Union has implemented measures to ensure that businesses’ will ultimately have no choice but to undergo decarbonisation.
On Thursday the 1st of June 2023, lawmakers within the European Parliament voted 366-224 on the new rules for businesses, which are underpinned by the Europe Commission’s adoption of a proposal for a Directive on Corporate Sustainability Due Diligence, also known as the CSDDD or CSDD Directive. Whilst the broad aim of the directive is to promote sustainable and responsible corporate behaviour, the rules will inevitably require companies to identify and address the environmental and social impact of their activities and value chains, whilst also mandating that companies adopt and implement climate transition plans.
Accordingly, this article will focus on the purpose of the CSDDD, who the CSDDD applies to, and how businesses can not only prepare for, but leverage, the opportunities associated with the forthcoming CSDD Directive.
What is the Corporate Sustainability Due Diligence Directive (CSDDD)?
The detrimental effects of climate change upon both the environment and humanity, coupled with the critical role that businesses play in paving the way towards a sustainable economy and society, has seen immense pressure from a broad range of stakeholder groups. In an attempt to shape a more sustainable global economy and society, these groups have therefore been calling for businesses to be subject to mandatory due diligence rules - with over 70% of the businesses who responded to the public consultation clearly calling for EU action on corporate sustainability
In response, lawmakers within the European Parliament have confirmed that the CSDDD will be introduced in an attempt to ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside of Europe. The core elements of the CSDDD include identifying, preventing, mitigating and accounting for negative environmental and human impacts of the company's wider operations. The directive seeks to achieve such aims through providing guidance and incentives to directors to contribute to sustainability and climate change mitigation goals, and via mandates - such as requiring certain large companies to develop and implement a sustainability strategy.
Who does the EU CSDDD apply to?
The EU expects the directive to directly impact around 13,000 companies within the EU and approximately 4,000 outside the EU.
Large EU limited liability companies: The first group of businesses affected by the CSDDD are large EU limited liability companies, which includes companies across two key sub-groups.
- Group 1: Companies with 500+ employees, and €150m+ net turnover worldwide. This group has been estimated to consist of around 9,400 companies.
- Group 2: Companies with 250+ employees, €40m+ net turnover worldwide, and is estimated to include around 3,400 companies operating in defined high impact sectors (e.g. textiles, agriculture, extraction of minerals). The rules start to apply to group 2 two years later than for group 1.
Non-EU companies: Meanwhile, an estimate of around 4,000 non-EU companies fall under the scope of the directive. These companies operate as ‘third country’ companies, yet still generate turnover in the EU which aligns with the threshold of groups 1 and 2.
Micro-companies and small-to-medium enterprises (SMEs): Finally, whilst micro companies and SMEs are not directly affected by the forthcoming rules; the directive provides several key supporting measures for smaller companies which must be accounted for by businesses who wish to not only mitigate sustainability risk, but also reap the long-term strategic benefits of decarbonisation.
The requirements of the CSDDD
- Due diligence: Most importantly, CSDDD affected companies will have to ensure that due diligence is a key factor within policy development and implementation.
- Impact identification: Companies which fall under the scope of the CSDD Directive will have to take the appropriate measures to identify the actual or potential adverse environmental and human rights impacts of their operations, their subsidiaries and their supply chain.
- Risk mitigation: CSDDD affected businesses will then be required to actively mitigate the identified risks within their own operations, as well as the operations of their wider supply chain.
- Action plan: Companies which fall under the scope of the CSDDD will be mandated to develop and implement not only an action plan, but also a timeline for addressing the identified environmental and social risks of their operations.
- Grievance mechanisms: CSDDD affected companies will be required to establish grievance mechanisms for workers and stakeholders in order for them to raise issues if they arise.
- Align with targets: Ultimately, CSDDD influenced companies will ultimately be required to align their business model and strategy with the 1.5°C target of the Paris Agreement;
- Reporting: Last but not least, companies will be mandated to develop and publicly publish sustainability reports with a key focus on due diligence.
The benefits of the CSDDD
The European Commission has identified a range of opportunities and benefits associated with the directive applicable to all stakeholders of climate change; however if businesses do not prioritise sustainability and leverage such opportunities, they will inevitably be subject to vast financial and non-financial risks.
For companies, the key benefits and opportunities associated with the CSDDD include:
- A harmonised legal framework in the EU, creating legal certainty and level playing field.
- Greater customer trust and employees’ commitment.
- Better risk management and adaptability.
- Better access to finance.
For citizens, the key benefits and opportunities associated with the EU CSDDD include:
- Better protection of human rights, including labour rights.
- Healthier environment for present and future generations.
- Increased trust in businesses.
For developing countries, the key benefits and opportunities associated with the EU CSDDD include:
- Better protection of human rights and the environment.
- Increased stakeholder awareness on key sustainability issues.
- Sustainable investment.
- Increased take-up of international standards.
How to prepare for the CSDDD
Ultimately, the most important step which businesses must take when preparing for the CSDDD is to prioritise sustainability immediately. As a first step, it is highly recommended that businesses are proactive in taking measures that place sustainability as a central strategic focus, such as:
- Collecting and monitoring operational data from business operations, suppliers, and partners to identify risks in the supply chain, and for inclusion in sustainability reports.
- Leveraging the power of sustainability software to develop and implement a sustainability strategy that aligns with the latest relevant sustainability and ESG regulations, policies and trends.
- Engaging with stakeholders in order to reduce scope 3 emissions.
- Developing and publishing sustainability reports in line with key reporting frameworks.
Spotlight: CSDDD vs CSRD
The Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD) are not mutually exclusive; and are intended to be applied in tandem by corporate entities who fall under the scope of both directives.
The CSDDD outlines mandatory due diligence companies must implement regarding the environmental and human rights impacts along their supply chains. Meanwhile, the Corporate Sustainability Reporting Directive (CSRD) serves as the primary reporting mechanism for which corporations will report on their sustainability actions. While the CSDDD is being introduced in an attempt to ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe, the CSRD aims to improve the transparency and consistency of sustainability reporting by companies operating in the EU, and is part of a broader trend towards increased disclosure and transparency around climate-related risks and opportunities.
Despite the different focus points of each directive, both proposals cite the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights as the main international due diligence frameworks.
To be fully prepared for the EU’s Corporate Sustainability Due Diligence Directive, businesses must not only start collecting data, but develop and implement a comprehensive sustainability strategy across their wider supply chain. Plan A provides a comprehensive carbon accounting and decarbonisation platform that allows businesses to easily collect and streamline their emissions data, measure and analyse their carbon emissions, and report on their sustainability and ESG performance.
Businesses who wish to stay ahead of the curve must start preparing now. Book a demo with Plan A today.