Corporate sustainability: get ready for the CSRD CSDD Directives

Introduction

The European Commission’s Green Deal has set the ambitious target of reducing net greenhouse gas emissions within the EU by 55% by 2030. It has backed this up with two directives on corporate governance – the CSRD (in force) and the CSDD (coming soon) – that together push organisations to act not only on their environmental footprint, but across the Environmental, Social and Governance space. The CSRD is the reporting framework by which companies must report their relevant sustainability activities. The CSDD, meanwhile, outlines the mandatory due diligence companies must implement regarding human rights and environmental impacts along their supply chains.

What does the CSRD change?

Governance has been a sustainability topic for EU companies ever since the Non-Financial Reporting Directive (NFRD) was introduced in 2014. The move to the CSRD, however, beefs up the requirements in this area considerably. Key changes include:

• more detailed reporting requirements
• reporting according to mandatory EU Sustainability Reporting Standards (ESRS)
• more upstream and downstream sustainability reporting
• a requirement to digitally ‘tag’ the reported information, and
• the extension of the requirements to more companies over time.

Under the CSRD, companies must review their business activities and determine the extent to which they make a substantial contribution to the six EU environmental goals: climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems.

What will the CSDD change?

The idea behind the directive on Corporate Sustainability Due Diligence is to promote greater corporate responsibility, improve sustainability due diligence standards and corporate governance of human rights, and aid stakeholders' rights to access remedies across global value chains. The directive establishes a framework for CSDD that addresses negative impacts on human rights and the environment.

Still a work-in-progress at the time of writing (May 2023), the thrust of the legislation is that companies will be required to identify and, if necessary, prevent, mitigate or end any harmful impacts of their activities on human rights. Think child labour and worker exploitation, as well as environmental impacts such as pollution and biodiversity loss. It will target current and potential adverse human rights and sustainability risks by setting out obligations for companies and their subsidiaries. Requirements could also affect any entities with whom a company has a corporate relationship.

When will the CSDD affect me?

The CSDD is expected to enter its final form in the second half of 2023. Implementation is not expected before 2025, however, given the expansive reach of the directive, it makes sense to start preparing your internal due diligence processes earlier rather than later.

Conclusion

With the targets set out by the ‘Green Deal’ revolutionising the business world and changing the way businesses must operate, the CSDD and CSRD represent important steps towards promoting sustainable and responsible corporate behaviour. The CSDD aims to establish a framework for identifying and preventing or mitigating harmful impacts that a company may have on the environment, human rights and other areas. The CSRD, meanwhile, modernises and strengthens the rules surrounding ESG reporting. By bringing uniformity to the reporting process, it should create transparency and certainty for investors.

In the next post, “CSRD: A Deeper Dive”, we discuss the proposed directive on Corporate Sustainability Reporting in detail. We look at the CSDD later in the series.