One of the major challenges for the current European business environment is trying to keep up with the rapid pace of new ESG requirements. Many companies are in preparation for the CSRD, SFDR, CBAM and various sector specific requirement, but to manage ESG compliance in the long-term, it is important to keep looking forward. The Corporate Sustainability Due Diligence Directive (CSDDD), which is not yet formally accepted, shall build on the CSRD’s reporting obligations by introducing action-driven requirements. Therefore, it is imperative to integrate the future CSDDD requirements in any preparation for the CSRD.

This article is written by Gidion Lont ([email protected]) and Hendrik Bastiaans ([email protected]). Gidion and Hendrik are both part of RSM Netherlands Business Consulting Services with a specific focus on Sustainability and Supply Chain Management.

The CSRD represents a paradigm shift in how large EU companies will approach ESG transparency and responsibility. Under the CSRD, companies are mandated to comprehensively disclose their impacts on the environment and society, focusing not only on the inherent risks and opportunities but also on their strategies and governance structures for managing these issues. To ensure its credibility, an external auditor must provide (limited) assurance on the report. 

Interestingly, the CSRD only requires companies to report on a specific set of EU reporting standards. These standards require that there is ESG due diligence on the operations and the supply chain to check for human rights and sustainability risks. The report should include the identified risks and opportunities, (when available) information on the specific actions to remove, mitigate, and remedy the identified risks and share details on ESG performance. However, the CSRD itself does not impose any requirements regarding a minimum level of ESG performance, established actions, policies or year-on-year progress that companies must achieve. Whether the ESG performance is sufficient is left for stakeholders to decide on. They are expected to integrate the reported ESG performance of companies in their decision-making processes on whether to purchase from, partner with, or invest in these companies. Therefore, the CSRD is seen as a self-enforcing instrument. 

The CSRD underscores the need for a holistic approach to corporate sustainability, aligning business practices with broader societal and environmental goals. For a deeper understanding of the specifics of how the CSRD works, our updated 2024 CSRD White Paper offers comprehensive insights.

Connecting the CSDDD with your CSRD reporting 

The CSDDD is expected to be implemented soon after the CSRD and will complement the reporting requirement by adding action-driven obligations. The CSDDD extends the scope of accountability, demanding companies to not only report but address both actual and potential adverse impacts on human rights and the environment in their operations and across their entire business chain. This includes upstream and downstream operations, subsidiaries, and business partners where adverse impacts are likely to be present or most significant. Due diligence processes may be implemented on a risk-based approach, focusing on the areas or sectors where adverse impacts are most likely to occur or are most severe. 

Furthermore, businesses will need to deliver and implement a plan to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy, limiting of global warming to 1.5 °C in line with the Paris Agreement and achieving climate neutrality by 2050. In case climate change is considered a material risk, the CSDDD also requires a Greenhouse gas emission reduction action plan.

Forward thinking

As the council adopted the CSDDD proposal last year, it is expected that the CSDDD will be approved by the current EU Parliament before the upcoming election on 6-9 June 2024. For the first group of companies, the due diligence requirements may be applicable as soon as 2026. 

The CSDDD will build on the CSRD by requiring action in addition to reporting. It must be stressed that the CSRD therefore is not an end-result, but rather the start of a corporate journey towards more sustainable operations and supply chains. Although current legal obligations already increase the administrative burden on companies and are impactful in driving positive change, the road to a just, climate neutral and circular economy has only just started. Future-proof European companies must adapt to fit in this new economy. By adopting this mindset of future change during their preparations for the CSRD, companies will be able to comply with the CSRD in a manner that sets them up for both future ESG compliance and business success. 

It is advised to use the CSRD as the steppingstone, by going beyond minimal compliance by organizing and setting up the required processes to report and, in the future, act on adverse impacts. By identifying and assessing the parts of their operations and supply chains that are most susceptible to human rights infringements and sustainability risks, future activities to reduce adverse impacts can be planned. Starting discussions about (reducing) these adverse impacts with the relevant operational business units and suppliers may be an appropriate first step in preparing for the CSDDD. 

RSM is Thought Leader in the field of Supply Chain and Sustainability consulting. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of regulatory obligations and practical applications in working with our customers. If you want to know more, please reach out to one of our consultants.