The Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) is an EU directive currently working it’s way through the EU legislative 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.
Objectives of CSDDD
Aligned to the EU 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.
What benefits are gained from CSDDD?
CSDDD aims to promote a level playing field among companies and establish guidelines for sustainability, facilitating alignment towards a more sustainable economy. This will help create more cohesive EU policies, resulting in increased risk management and resilience in the face of changing market conditions. Additionally, businesses with a clear transition plan will have better access to finance, a crucial aspect of the directive.
Who does CSDDD apply to?
In the final text which was agreed by the EU Council on March 15th 2024, there were three phases of implementation:
Phase 1 – within 3 years companies with 5,000 employees and EUR 1,500m in turnover.
Phase 2 – within 4 years companies with 3,000 employees and EUR 900m in turnover.
Phase 3 – within 5 years companies with 1,000 employees and EUR 450m in turnover.
What will business need to do to comply?
There are 6 main requirements to satisfy CSDDD obligations. These can be summarised as:
1. Integrate due diligence into policies and management systems
2. Identify and assess adverse impacts
3. Prevent, cease or minimise actual or potential impacts
4. Assess the effectiveness of due diligence
5. Communicate your approach and progress
6. Provide remediation for impacts
These requirements will mean many businesses will need to adapt many of their internal policies and controls to adapt to the new directive. To help businesses to integrate due diligence mechanisms into their operating model we follow four key activities.
Impact Assessment
The first activity we perform with clients is to assess their actual or potential impacts from their business model. This assumes a business model is documented, which isn’t always the case. A well documented business model is critical when adopting EU sustainability policies and we advocate strongly that all companies should invest time in this.
By using the business model as an index, we look across the value chain to understand where there are social and environmental interfaces for the business and determine what levels of protection already exist.
Policy and Process Implementation
With impact areas mapped across the business, we work to integrate due diligence into the operating policies and procedures of the business. In many cases, this will be an amendment to an existing instrument, such as a supplier code of conduct, or a procurement process.
For some businesses, due diligence needs to extend much further into the operating model. Changing product design processes or long term strategies. We work across the business to connect operational processes to strategic objectives, incorporating due diligence at all appropriate levels.
We also work with audit and risk committees of the board or their equivalent to ensure the internal controls satisfy assurance requirements to feed into the internal and external audits of the business.
Finally, we work with clients to either develop or adapt their climate transition plan to ensure it aligns to the Paris Agreement and that it takes into account the updated due diligence framework which we’ve implemented.
Impact Remediation
A key element of CSDDD is to remediate impacts where they are identified. This spans across taking action to stop current activities to implementing grievance mechanisms for impacted stakeholders. We work with clients to identify the appropriate actions to take and help to implement the relevant processes to remediate the impacts already observed from the business.
Communication and Review
Communicating the approach taken by the business to due diligence helps to provide transparency and demonstrates the commitment to preventing impacts to human rights and the environment. We work with clients to build stakeholder communication plans. Most clients subject to CSDDD are also in scope for CSRD. We ensure that the overlap between the two directives is clear and that effort is only applied once.
Due diligence is not a one-time activity for the business to perform to satisfy a policy directive. We ensure clients have a process to review and determine if the policies and processes in place are effective and preventing further impacts.
How we can help
We’ve worked with complex global businesses to help them to implement a due diligence framework aligned to CSDDD. If you’d like to learn more, please get in touch and one of our experts will arrange a call to discuss how we can help you.
To learn more about CSDDD and other EU sustainability policies, take a look at our knowledge hub.
