On March 15th, the European Union approved the Corporate Sustainability Due Diligence Directive (CSDDD), aimed at enhancing corporate accountability and sustainability standards across the EU. The CSDDD is an important part of the EU's Green Deal legislative package that will layer on top of, among other ESG-related rules, the CSRD, whilst supporting the EU’s drive towards aligning legal frameworks with their climate and net zero targets.
After considerable deliberation, and notably two failed attempts to pass the directive, the CSDDD has been finalised to include companies with a net worldwide turnover of more than €450 million, as well as having more than 1,000 full-time equivalent employees on average, which will ultimately effect approximately 5,300 enterprises.
Who needs to comply with CSDDD?
The CSDDD applies to EU-based companies surpassing the specified financial threshold (€450 million) and non-EU companies with substantial operations within the EU.
This includes not only companies meeting the threshold but also the ultimate parent companies of corporate groups, ensuring comprehensive coverage under the directive.
The directive introduces a phased compliance timeline based on company size and capacity, ranging from three to five years.
This applicability of CSDDD for in scope companies will be phased in as follows:
Companies with more than 5,000 employees and a turnover of €1,500 million+ will be impacted 3 years after the CSDDD comes into force
Companies with more than 3,000 employees and a turnover of €900 million+ will be impacted after 4 years
Companies with more than 1,000 employees and a turnover of €450 million+ will be impacted after 5 years
What are the key provisions and requirements of CSDDD:
The CSDDD (Corporate Sustainability Due Diligence Directive) mandates a comprehensive approach to due diligence throughout the supply chain, covering both upstream and downstream activities.
This includes obligations for companies to identify, prevent, remedy, and minimise potential or actual negative impacts on human rights and the environment. Here's a breakdown of the key obligations outlined in the directive:
Corporate governance and operational measures to support the identification and reduction of negative impacts;
Due diligence of upstream/downstream value chain and related risk mapping;
Establishment of a notification and grievance/whistleblower mechanism; and
Climate change-related steps, including adopting a plan to transition to a business model in line with the 1.5 degree warming target.
What does CSDDD mean for SMEs?
The CSDDD is relevant for small and medium-sized enterprises (SMEs) as they often operate within the supply chains of larger corporations. With the implementation of this directive, SMEs are likely to face increased pressure to disclose information about their operations to meet the due diligence requirements set by their corporate partners. In particular, the requirement for organisations to adopt a decarbonisation plan in line with a 1.5 degree warming target will result in the need for greater efforts to reduce supply chain emissions, which will ultimately act as in indirect regulatory driver for SMEs. How can SMEs prepare for increased pressure to disclose more information?
Assess Current Practices: Conduct an internal assessment to evaluate current sustainability practices and understand carbon hotspots. Determine what information is already being collected and reported and identify any gaps that need to be addressed.
Implement Robust Data Collection Systems: Establish systems for collecting accurate and reliable data related to environmental impact. This process can be made much simpler by investing in technology or software solutions that facilitate data collection and analysis, such as the ZeroBees platform.
Build Capacity and Expertise: SMEs will likely need to build internal capacity and/or seek external expertise to effectively manage sustainability reporting and disclosure processes and to ensure preparation for increasing requirements in future.