The EU Corporate Sustainability Due Diligence Directive (CSDDD) is almost here, and it’s impacting businesses across the globe. NAVEX is here to help you understand the requirements and develop a plan to meet EU CSDDD compliance requirements.
The Corporate Sustainability Due Diligence Directive is significant EU legislation mandating that EU and non-EU companies within its scope perform thorough environmental and human rights assessments throughout their operations, subsidiaries and supply chains.
According to the outlined regulations, companies must recognize potential and actual adverse environmental and human rights effects stemming from their operations, subsidiaries and business ties. They must implement measures to prevent or alleviate any potential impacts they detect and halt or reduce any real impacts. In principle, the requirements affect the entire chain of activities, upstream and downstream.
While all direct and indirect suppliers should be included in the assessment of the upstream activities, indirect business partners are not included in downstream activities. Downstream transportation, storage, and distribution activities must only be covered if conducted on the company’s behalf.
Learning how to stay compliant with EU CSDDD requirements can bring up many questions:
How can we systematically address potential ESG risks within our operations and supply chains in alignment with CSDDD guidelines?
What steps should we take to integrate sustainability considerations into our workforce training and development programs, ensuring ongoing compliance with CSDDD requirements?
How can we adapt our corporate governance structures, policies and procedures to reflect the principles in the CSDDD?
Where can we utilize technology to stay informed about updates to the CSDDD framework or other supply chain laws (e.g., the German Supply Chain Due Diligence Act)?
EU CSDDD reporting and requirement challenges
Complying with the Corporate Sustainability Due Diligence Directive requires a proactive and comprehensive approach to address the various challenges.
Embedding sustainability considerations in corporate practices
Failing to prioritize sustainability principles into business operations can result in negative environmental impacts, social inequalities and reputational damage. Without a comprehensive approach to sustainability, companies risk falling short of meeting stakeholder and customer expectations and regulatory requirements.
Implementing effective employee and stakeholder training
Insufficient training programs may impede employees’ understanding of sustainability goals and their role in achieving them. By not providing comprehensive training, companies are unable to foster a culture of sustainability, nor empower employees to make informed decisions, leading to potential mistakes.
Leveraging technology solutions for sustainability management
Inadequate technology infrastructure may hinder the collection, analysis, and reporting of sustainability data. Without investing in purpose-built solutions, companies may not be able to effectively monitor environmental and social impacts, identify areas for improvement, or demonstrate progress toward sustainability goals.
Managing sustainability policies and compliance
Complex regulatory landscapes and evolving sustainability standards pose compliance challenges – it can present quite the juggling act. Failure to create robust policies and procedures around sustainability means companies may be unable to mitigate risks, comply with regulations, or build credibility with stakeholders.
Complying with the EU CSDDD means businesses need to provide visibility into their impact on the environment and society. While this presents challenges in meeting the requirements, it also comes with business benefits, including:
Meeting CSDDD compliance requirements
The CSDDD aims to establish rigorous standards for corporate sustainability practices. To stay compliant, your company should follow these steps:
Educate employees and stakeholders on CSDDD compliance
Begin by educating all relevant parties on the provisions and implications of the Corporate Sustainability Due Diligence Directive. Training programs should cover the regulatory framework, emphasizing the importance of sustainable business practices, and the consequences of non-compliance with the CSDDD.
Develop comprehensive sustainability governance policies
Establish robust and well-documented policies for sustainability governance that align with the principles outlined in the CSDDD. These policies should encompass the entire lifecycle of sustainability practices, from planning and implementation to monitoring and reporting. Clear guidelines on environmental impact, social responsibility, supply chain ethics and corporate governance must be defined.
In addition, companies must publish annual reports to ensure transparency of the program’ progress.
Regularly assess and monitor sustainability initiatives
The CSDDD outlines compliance assessments as the procedure for confirming and/or showing that a company’s sustainability practices meet specific criteria specified within the directive. Companies must regularly assess and their sustainability initiatives and programs every 12 months, as well as those of third parties, to ensure compliance with the CSDDD.
Conduct regular audits, risk assessments and impact assessments to identify and mitigate potential risks or non-compliance issues in sustainability practices.
Companies must also implement plans for transitioning towards climate change mitigation and guarantee that their business model and strategy align with the shift towards a sustainable economy.
Implement a sustainability governance framework
Deploy a sustainability governance framework integrating compliance processes, risk management strategies and monitoring mechanisms. This framework should facilitate transparency, accountability~,~ and ethical decision-making throughout your sustainability efforts, promoting responsible corporate citizenship and sustainable development.
Establish a complaints procedure
Businesses must create and enact a robust and easily accessible whistleblowing system for handling complaints to acknowledge and resolve issues brought up by various stakeholders, such as employees, customers, and communities affected by their activities.
There are three key dates to keep an eye on regarding the CSDDD legislation timeline:
The CSDDD applies to companies operating within the European Union, with a focus on those engaged in activities that pose high sustainability risks, such as those related to environmental, social, and governance (ESG) factors.
The CSDDD aims to ensure that companies conduct due diligence to identify, prevent, mitigate, and account for sustainability risks and adverse impacts in their operations and supply chains. It covers various aspects of sustainability, including environmental protection, human rights, labor standards, and anti-corruption measures.
Companies found to be non-compliant with the CSDDD may face fines of up to 5% of their global net turnover. Additionally, there might be potential civil liabilities for damages caused by the company’s failure to adhere to sustainability due diligence requirements.
CSRD reporting refers to the Corporate Sustainability Reporting Directive, which mandates certain companies to disclose non-financial and diversity information in their annual reports.
CSRD focuses on reporting non-financial and diverse information, while CSDDD emphasizes conducting due diligence to address sustainability risks and adverse impacts in business operations and supply chain.
Exceptions for the CSRD reporting may vary depending on the size, nature and location of the company. Some SMEs may be exempt from certain reporting requirements.
Whether US companies are subject to CSRD depends on various factors including their presence and operations within the European Union and whether they meet the criteria set forth by the directive.
