The European Green Deal launched by the European Commission in 2019 is a set of proposals that aim to reduce greenhouse gas (GHG) emissions and support the transformation of the EU into a modern and competitive green economy by 2050. Within this deal are a set of other key initiatives such as the Fit for 55 package which forms the backbone for many of the legislative revisions to all sectors of the economy with the end goal of achieving a 55% GHG reduction by 2030 as well as preparing the implementation of the green deal. [1] [2] These legislative efforts are testament to the strong commitment shown by the bloc in recent years to achieving and leading sustainability initiatives.  

 

CSRD: Core Focus on Reporting 

 

The CSRD’s aim is to ensure businesses can no longer cherry pick which sustainability topics they would like to report on. It will be mandatory that all EU companies gather the required sustainability information and report according to their activities.  

 

Within the CSRD’s robust framework, the ESRS which outlines the specifics of how companies should report their sustainability information, it is expected that when companies report their Environmental, Social, and Governance (ESG) impacts any reporting will need to be audited by a third party, covering sustainability-related opportunities and risks, targets, and opportunity management. [5]  

 

The long-term goal with the CSRD is to see capital flow into sustainable businesses, which will also play an important role in the region’s sustainable finance strategy. This is essential to ensure the European Green Deal goals are achievable. 

 

By enhancing the depth of financial information, the CSRD will enable investors to make better informed decisions, aligning their investment choices with a company’s sustainability performance. Improved transparency with the CSRD will not only result in a more accurate evaluation of a company’s sustainability-related risks and opportunities but will also encourage a deeper understanding of its overall impact. 

 

Furthermore, the mandatory disclosure of sustainability issues will act as a catalyst for companies to enhance their sustainability practices, contributing to the cultivation of a more sustainable and resilient economy [10]. The incorporation of financial and impact considerations through the double materiality approach will give investors a holistic perspective on a company’s sustainability performance. This approach ensures a nuanced understanding of both the financial risks associated with the company and the broader environmental impacts from its operations. 

  

CSDDD: Core Focus on Due Diligence 

 

One of the policies that forms part of the Green Deal is the Corporate Sustainability Due Diligence Directive (CSDDD). The Directive would require companies to establish due diligence procedures to address the relative impacts of their actions on human rights and environmental issues across operations, supply chains and subsidiaries. [2] [3]  

 

It is expected that the entity in question would need to develop a ‘prevention action plan’ that obtains assurances from any direct and indirect business partners who will also be required to comply with the plans. [4] While the proposal is anticipated to be adopted in 2024, its alignment with the Corporate Sustainability Reporting Directive (CSRD) due to come into effect in January 2024, replacing the Non-Financial Reporting Directive) and other key regulations such as the EU Taxonomy is clear.  

 

Key Differences Between the Two 

 

While both Directives complement each other and there is a strong emphasis on interoperability there are key differences. The distinction between CSDDD and CSRD lies in their focus and scope, although both share a common goal of enhancing transparency within companies’ supply chains. The CSDDD mandates specific due diligence steps, legally obligating companies to investigate and mitigate the environmental and human rights impacts of their operations globally.  

 

The proposed due diligence rules mandate companies to identify and mitigate human rights and environmental impacts within their operations, subsidiaries, and value chain. The Directive outlines six steps which can be observed in figure 1, aligning with the OECD Due Diligence Guidance for Responsible Business Conduct. [11]  

The steps also extend beyond EU borders, applying to both EU and non-EU entities, ensuring a comprehensive assessment of actions wherever they operate. The primary objective is to compel companies to take necessary measures to minimize or eliminate adverse effects on the environment and human rights. 

 

On the other hand, the CSRD revolves around a reporting framework, mandating how companies should communicate sustainability information through the European Sustainability Reporting Standards (ESRS). Tailored for EU companies, its emphasis lies in pushing transparency and disclosure of ESG performance. By ensuring consistent and comparable reporting, the CSRD provides stakeholders with a coherent and accessible overview of a company’s sustainability practices. 

 

Despite their nuanced differences, the CSDDD and CSRD share a foundation rooted in the OECD Guidelines for Multinational Enterprises and the UN guiding principles on Business and Human Rights. Both directives align with these international due diligence frameworks, emphasizing that adherence to these guidelines positions companies on the path to compliance with either directive. This commonality underscores the interconnected nature of their objectives, uniting them in a broader global framework for sustainable business practices. [6] 

 

Human Rights and Environmental Impacts Covered in CSDDD 

 

As part of its focus on corporate due diligence, the CSDDD covers several listed rights and prohibitions that encompass labor rights, freedom of thought, conscience, religion, freedom of association, assembly, and collective bargaining. While not explicitly mentioned, freedom of expression is considered within due diligence for media organizations.  

 

Environmental aspects include violations related to waste handling, collection, storage, disposal, and use of biological resources affecting biodiversity. For companies exceeding 500 employees and EUR 150m turnover must align business models with sustainability goals and the Paris Agreement’s 1.5 °C target. Climate-related risks mandate emissions reduction objectives in the plan. [7] 

 

Who Falls Within CSDDD 

 

The CSDDD mandates specific obligations for four different types of companies. All covered entities must implement due diligence measures to address negative human rights and environmental impacts. This includes developing prevention action plans, securing assurances from business partners, and ensuring compliance across their value chains. 

 

Companies with a turnover exceeding 150 million Euro (groups 1 to 3) are additionally required to align their business strategy with limiting global warming to 1.5 °C, as per the Paris Climate Agreement. Those identifying climate change as a principal risk or impact must integrate emissions reduction objectives into their business plans.[8] 

 

The proposal establishes senior-level responsibility for sustainability, requiring directors of EU companies to oversee due diligence implementation and integration into corporate strategy. The CSDDD expands directors’ fiduciary duty to include considerations of human rights, climate change, and environmental impacts in acting in the company’s best interests.[9]  

By navigating these directives, companies can effectively streamline their compliance efforts, thereby enhancing their contribution to the broader global framework for sustainable business practices. Nevertheless, as the imminent approval of the CSDDD looms in 2024, taking immediate action becomes crucial for companies aiming to navigate the intricate landscape of regulatory compliance successfully. 

 

Despite the pending finalization of the CSDDD, it’s important to note that key aspects are unlikely to change. This provides companies with the opportunity to promptly initiate appropriate actions and proactively prepare for the upcoming CSRD scheduled for January 2024. 

 

Regarding the CSDDDs timeline, its proposal by the European Commission began in February 2022. Currently awaiting approval from the European Parliament and Council, this process may take up to a year. The CSDDD is anticipated to become mandatory around 2025-2026. It’s important to acknowledge that these timelines depend on the successful approval of the proposal by the European Parliament and Council, introducing an element of uncertainty until this crucial step is completed.  

 

Meanwhile, the timeline for the over 49,000 companies set to comply with the CSRD beginning January 2024 should have an established data collection process in preparation for their data compliance reports of 2024 in 2025. In January 2025, large companies will then need to embark on their first CSRD reports, covering 2025 data and submitting them in 2026. Additionally, by January 2026 listed small and medium sized enterprises (SMEs) will fall under compliance requirements of the CSRD too, submitting reports on their 2026 and 2027 performance.  

Sources 

[1] https://www.cbi.eu/market-information/eu-green-deal-how-will-it-impact-my-business 

[2] https://www.consilium.europa.eu/en/policies/green-deal/ 

[3] https://www.ebu.ch/case-studies/open/legal-policy/the-future-of-eu-sustainability-regulation-ii-the-corporate-sustainability-due-diligence-directive-csddd 

[4] https://kpmg.com/xx/en/home/insights/2023/02/the-eu-corporate-sustainability-due-diligence-directive.html 

[5]https://www.ibm.com/topics/csrd#:~:text=CSRD%20reporting%20must%20be%20audited,is%20optional%20for%20most%20businesses.&text=CSRD%20reports%20must%20cover%20sustainability,a%20focus%20on%20forward%20planning 

[6] https://blog.worldfavor.com/csddd-vs-csrd-whats-the-difference 

[7] https://www.dlapiper.com/en/insights/publications/global-esg-alert/2023/eus-proposed-directive-on-corporate-sustainability-due-diligence-what-us-companies-need-to-know 

[8] https://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX%3A52022PC0071 

[9] https://www2.deloitte.com/uk/en/blog/emea-centre-for-regulatory-strategy/2023/what-is-the-european-corporate-sustainability-due-diligence-directive.html 

[10] https://www.apiday.com/blog-posts/4-ways-the-corporate-sustainability-reporting-directive-csrd-will-change-investing#:~:text=By%20providing%20more%20detailed%20and,on%20a%20company’s%20sustainability%20performance. 

https://www2.deloitte.com/uk/en/blog/emea-centre-for-regulatory-strategy/2023/what-is-the-european-corporate-sustainability-due-diligence-directive.html