The Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) is an EU directive which recently completed the political process. It is a policy, aligned to the European Green Deal, designed to ensure large businesses operating within the EU apply consistent due diligence processes to their own operations and their value chain. The intent is to prevent, mitigate and account for adverse human rights and environmental impacts. The first step for any business in scope of the directive is to perform an impact assessment. In this article, we describe how we approach performing a CSDDD Assessment.
CSDDD Overview
Aligned to the European Green Deal, the objective of CSDDD is to provide a consistent approach to corporate due diligence across businesses operating within the EU market. Introducing this ensure companies have advanced levels of respect for human rights and environmental protection. The directive also requires businesses to have a transition plan for their business model, aligned to the Paris climate agreement, which includes appropriate due diligence to prevent future impacts. You can read our introduction to CSDDD here.
Impact Assessment
The first steps for any business in scope of CSDDD is to perform an impact assessment. This activity will help companies to prepare by determining their current state of due diligence and impacts across their value chain. The first activity is to develop a value chain map, clarifying where the potential or actual impacts are located. This activity should include a stakeholder mapping, ensuring all relevant internal and external stakeholders across the value chain are identified so they can be engaged meaningfully through the process. Following this, work needs to be done to identify the actual and potential impacts across the value chain. This critical step enables the business to understand their impacts and risk exposure as a company. This will also help to shape the actions required to comply with CSDDD.
The first activity is to develop a value chain map, clarifying where the potential or actual impacts are located. This activity should include a stakeholder mapping, ensuring all relevant internal and external stakeholders across the value chain are identified so they can be engaged meaningfully through the process. Following this, work needs to be done to identify the actual and potential impacts across the value chain. This critical step enables the business to understand their impacts and risk exposure as a company. This will also help to shape the actions required to comply with CSDDD.
Value Chain Definition
Companies are being compelled to take responsibility for their value chain under CSDDD. This includes upstream elements, their own operations and downstream elements. All businesses implicitly know what their value chain consists off, but many do not have a clear and consistent definition documented which will help them when adopting regulations such as CSDDD.
We find it helpful to segment the value chain into logical stages. This differs significantly across sectors but broadly speaking the upstream value chain reflects all the inputs into the business model. To work through this it can be helpful to consider a capitals model as guidance: Natural, Manufactured, Intellectual, Human, Finance and Social. This helps to develop a clear picture of the stages upstream of the business, the stakeholders involved and the materials and other inputs which the business consumes in its operations.
Looking at the businesses own operations, it’s important again to map out the logical flow of activity. A clear business model about what the company does, the methods it uses, who’s involved and the externalities to its activities helps build a picture of where impacts may exist.
Downstream, the transportation, distribution and storage of products is important to understand. Viewed through an impacts lens, there are many possible human rights and environmental impacts possible. Mapping this out clearly will ensure a strong compliance approach from the business.
Building this analysis of the value chain helps the company to understand the environmental, social and governance context which it operates in. For many, this will be a considerable shift in understanding from what the current perception is.
Impact Identification
With a clear view of the full value chain, it’s now possible to identify where the actual or potential impacts are. Within CSDDD it is expected that businesses take a risk based approach. This allows companies to look for hotspots across their value chain where risks are greatest. In our approach, we work with the business to understand their risk tolerance ahead of this activity. This allows for an objective assessment of impacts when identified based on severity and likelihood of risks.
It is critical at this stage to engage rights holders and stakeholders across the full value chain. The actions of the business may lead to many negative externalities which will only be discovered through meaningful engagement.
The impact analysis for human rights considers areas such as workers rights, conditions, wages, and their general treatment. It also considers communities involved in and adjacent to the value chain and the impacts on them from activity such as pollution, resource scarcity, and health impacts.
For environmental considerations the focus is on pollution, waste management, the use and management of water resources, and relationships and impact on biodiversity along the value chain.
Controls Assessment
The function of corporate due diligence will require adequate controls to ensure compliance. Every business already has some form of due diligence in place. We focus on clarifying the current state of due diligence policies and processes, and assess them for suitability for CSDDD compliance.
The clarity provided from mapping impacts across the value chain and the relevant stakeholders will identify what controls are required, in which parts of the business to prevent impacts. The assessment will also cover what remedial functions are required to provide grievance mechanisms for stakeholders.
Implementation Roadmap
- At this point, it will be clear what actions the company must take to adapt its due diligence mechanisms to CSDDD compliance. The roadmap will help to prioritise activities related to the highest risks across the value chain.
Generally, the roadmap will include the following activities:
- Build knowledge and skills across the business
- Evolve or create due diligence policies and processes
- Build a data dictionary of relevant information
- Design and implement management systems
- Extend corporate governance framework including risk management
- Implement and monitor grievance capability
- Monitor performance of due diligence mechanisms
- Develop reporting framework including integration with CSRD
The roadmap will initially focus on implementation and adaptation of existing mechanisms. Over time, this will shift towards regular reviews of effectiveness of implementation and ongoing assessment of risks across the value chain.
Helping you take the first steps
The timelines for CSDDD implementation span across several years, however companies have a lot to do to prepare. Our teams of experts take a pragmatic approach to help you focus on the right activities to perform to get started. Our CSDDD Impact Assessment service gives you a structured approach which will help you be clear about where you are as a business and what needs to be done to reach a state of compliance. We focus on practical activities, working in collaboration with your team to provide the capability and capacity required to efficiently integrate CSDDD into your business. Get in touch to find out more.
