What is the EU Corporate Sustainability Due Diligence Reporting Directive (CSDDD)?

 

In the face of escalating environmental and social challenges, business sustainability has never been more critical for UK companies operating in Europe. Underestimating these concerns can have significant implications not just for the environment, but also for businesses, leading to potential supply chain disruptions, reputational damage, increased legal costs and a negative impact on competitiveness.

Recognising these challenges, the European Parliament has made a landmark move on 1st June 2023, agreeing on its position on the new Corporate Sustainability Due Diligence Directive (CSDDD). This revolutionary directive represents a golden opportunity to both extinguish harmful business practices and aid companies in managing sustainability-related risks effectively. The legislation harmonises existing laws in EU member states, offering companies a level playing field and an administrative ease that was missing earlier.

Beware your Supply Chain Risk Exposure

The CSDDD enforces a new set of obligations for businesses. These will involve recognising and counteracting the potential and actual effects of their operations on both the environment and instances of human rights abuses. These checks will not be limited to one’s immediate operations, but will extend to subsidiaries and other stakeholders across value chains that they have both direct and indirect established business relationships with.

Companies in-scope will be required to create and enforce ‘prevention action plans’ to mitigate potential environmental and human rights abuses. Furthermore, they would need to secure contractual assurances from their direct business partners, guaranteeing adherence to these plans. Following this, regular checks would be necessitated to ensure these standards are consistently met.

Three Critical Elements

To truly harness the transformative power of the CSDDD, three critical elements must be included:

1. Company-wide acknowledgement of Environmental Impact

The directive will support companies in assessing their environmental footprint throughout their operations, from product inception to consumption. It encourages businesses to make informed decisions aimed at minimising adverse environmental effects and unlocking sustainability-related opportunities. However, for the directive to be most effective, the scope of negative environmental impact should go beyond mere violations of international environmental conventions and align with the broader environmental categories of the EU Taxonomy.

2. Establishment of robust Environmental Targets and Transition Plans

The CSDDD offers a unique opportunity for European companies, including those in the UK, to shine in the realm of sustainability. It prompts companies to set stringent criteria for their sustainability targets and transition plans. By doing so, it not only benefits the businesses but also helps financial institutions by enabling better decision-making, reducing risks and providing clear legal guidelines.

For transition plans to be manageable and efficient, the CSDDD should align with the Corporate Sustainability Reporting Directive (CSRD) and provide key elements such as time-bound plans, absolute greenhouse gas reduction targets in line with the Paris Agreement, and comprehensive coverage of all environmental issues.

3. Director Incentives linked to Sustainability Performance

Lastly, a critical step in actualising a company’s sustainability plans and targets is incentivising management to implement them. The directive should recommend that directors’ remuneration be tied to the company’s sustainability performance. Companies that successfully incentivise their management can enjoy an array of benefits, such as cost reduction, increased efficiency, enhanced market share, and reduced legal, financial, and reputational risks.

Prominent investor groups such as the UN Principles for Responsible Investment, Eurosif, and the Investor Alliance for Human Rights, are urging policymakers to make the inclusion of sustainability factors in directors’ pay mandatory.

The ESG PRO Recommendation

The new CSDDD marks a significant step forward in corporate sustainability for businesses across Europe. With careful adherence to the key aspects of this directive, businesses can confidently navigate the challenges of sustainability, transforming them into opportunities for growth and resilience in an increasingly eco-conscious marketplace.

As with the EU CSRD, all large businesses are at risk of impact if they trade with the EU or have operations there. The priority for business leaders should be to prioritise conducting Supply Chain Sustainability Audits according to rigorous principles aligned to established ESG frameworks.

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Matt Whiteman

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