As the EU has got to work on its Green Deal agenda over recent years, almost every business operating in Europe will have felt the regulatory sunlight of increasing transparency on products, services, corporates and now supply chains. What was already strong focus on corporate reporting with the Corporate Sustainability Reporting Directive (CSRD), is now expanding to supply chain transparency as the Corporate Sustainability Due Diligence Directive (CSDDD) goes into its final legislative stage. While the far-reaching compliance considerations and operational details may initially seem dazzling for impacted businesses, they are a timely evolution of voluntary frameworks intended to drive holistic long-term value creation. As Europe heads into the summer season, now is the time for business leaders to ‘wear shades’ to focus on the intrinsic strategic opportunities with customers and take the potential glare out of the CSDDD.
Like the CSRD, the CSDDD is a clear call to action. Subject to the final legislative text, CSDDD will have significant direct and indirect implications throughout value chains worldwide and represents a step change in the current voluntary approach. In essence, the CSDDD will introduce a duty for board directors to set up and oversee the implementation of mandatory human rights due diligence and environmental due diligence (mHREDD) processes. These processes must be integrated into the corporate strategy and their operation reported on to stakeholders. Enforcement is expected to be through both public and private legal mechanisms (i.e., civil liability) and may involve fines of up to 5% of global turnover. In addition, the CSDDD includes an obligation (for many but not all companies in scope) to develop a ‘Paris-aligned’ climate transition plan (also in line with CSRD Art 19) that the Directors oversee and to which whose variable compensation targets will be fixed. The effective date is expected to be sometime in 2026, two years after the final text is published. That is not much time for what is a significant change in gear for companies, their Boards and the corporate ecosystem at large, regardless of whether they are directly in scope and their existing sustainability leadership credentials.
The CSDDD will directly impact EU and non-EU companies in scope (EU companies with 500+ employees and €150 million+ in net turnover worldwide, widening to companies with 250+ employees and €40million+ in net turnover worldwide two years later; and non-EU companies with equivalent EU-derived revenues). These companies should be already mobilizing potentially significant internal resources to meet the expected operational and legal requirements of mHREDD, alongside mandatory ESG reporting requirements including CSRD. To mention but a few likely implications: upstream suppliers and downstream customers will need to be mapped and assessed worldwide, procurement and sales contracts re-negotiated and amended, tech systems built (or significantly enhanced), new data captured, managed, analyzed and monitored, commercial strategies re-evaluated, climate transition plans considered and executive performance re-calibrated.
The commercial impacts are already being felt. Even for companies who are not in scope, the indirect impacts of the Directive will be significant.
Many companies are already pushing for value chain transparency globally, requiring even small companies to be systems- and data-ready to provide robust product, service and value chain-related data on their environmental and social impacts. Hence, as legal and operational teams assess the potential ‘glare’ of the detailed requirements, now is a great time for leaders of any business with a European nexus to look up and down their value chains to size the implications. Engaging with customers and value chain stakeholders now will help form a long-term view of what data capability will be expected both by them (to meet their own CSDDD obligations), and of them (to meet the needs of other companies) and on what timeline. Doing so now will position companies to prioritize building internal capabilities and get ahead of customer expectations. Striving to create a customer-friendly friction-free reporting experience that meets large customers’ requirements, as well as CSRD and other mandatory reporting requirements, is likely to create a commercial advantage. Transparency on sustainability performance is rapidly becoming a key driver of B2B and retail purchasing decisions, talent retention and broader license to operate. In short, this enhances the business case – and the imperative – for enhanced sustainability performance ahead of regulatory timelines.
By its very nature, the CSDDD will require collaboration across value chains on new and rapidly evolving topics and approaches. WBCSD works with its global membership of more than 200 large corporates to facilitate the sharing of knowledge and enable and accelerate the adoption of standards and tools across key areas of climate, nature and social equality as well as core capabilities. Specifically, WBCSD is working with its members to develop enhanced data and management capability on Scope 3 accounting and recently established a Preparers’ Forum for Sustainability Disclosure. Working collaboratively on these areas won’t lessen the operational requirements. Still, it can help remove the glare and give corporate leaders a line of sight on what matters, whatever the weather.
CSDDD in more detail.
Across their value change, companies, under Board supervision, will need to take appropriate measures to prevent (or where not possible, mitigate) potential adverse human rights or environmental impacts. These measures will include developing and implementing preventative action plans, seeking contractual assurances (with associated compliance measures). If the potential adverse impacts cannot be mitigated, the company will not be permitted to enter into new or extended relations with that business partner (something that will require amendments to Member State laws). All of this gets scooped up into a reporting obligation with enforcement to come from both public and private parties. Member states will need to set up newly-appointed (or empowered) supervisory authorities with investigative enforcement powers with sanctions to be determined at a Member State level but likely to include pecuniary sanctions (not more than 5% of company’s worldwide turnover). Critically, however, the CSDDD provides for civil liability and a basis for private enforcement actions. The Directive is now in the final legislative stage and subject to inter-institutional negotiations between the European Parliament, the European Council and the European Commission. Once it has been formally agreed and adopted – potentially in 2024 – EU Member States will have two years to implement the CSDDD into national legislation.