Introduction
The Corporate Sustainability Due Diligence Directive (CSDDD) is a landmark EU regulation that mandates large corporations, operating in the EU region, to perform and oversee human rights and environmental due diligence throughout their operations, subsidiaries and business partners. The companies are required to identify, assess, and address any actual or potential harm they have incurred, either individually or jointly, and facilitate remediation, if necessary.
The EU Parliament is close to approving the CSDDD text, thus paving the way for the Directive to become effective and applicable from mid-2027 for big corporations. However, considering the complexity of the new obligations and the extensive challenges posed by the CSDDD, the deadline set for 2027 is relatively tight. While few corporations may have certain capabilities to meet the new requirements, others will need to invest a significant amount of time and resources to implement these mandates.
In order to comply with the CSDDD, companies must incorporate their response to the legislation with a broader supply chain strategy and long-term sustainability transformation. This integration will streamline resources and ensure the approach is embedded into the overall corporate strategy, allowing companies to gain strategic benefits and mitigate legal, financial and reputational risks associated with non-compliance.
Although CSDDD is set to bring forth significant regulatory changes, companies may come across key challenges. In this blog, we explore these challenges and how organizations can navigate through them for a smooth transition.
In this blog, we delve into the implications of the EU Corporate Sustainability Due Diligence Directive (CSDDD) for businesses. From understanding the regulatory landscape to navigating key challenges and compliance strategies, we provide insights to help your business adapt effectively to this groundbreaking legislation.
Major Challenges linked to CSDDD
1. Increased Supply Chain Transparency
CSDDD mandates companies to identify and assess environmental and human rights impacts across their activities, similar to a value chain, that encompasses the production and distribution of goods and services. Companies must comprehensively understand their upstream and downstream supply chains to identify and assess impacts effectively. This requirement extends to indirect business partners, making it crucial to consider Tier 1 suppliers’ supply chains as well as those of Tier 3 and 4 suppliers.
However, the Directive lacks specific details on mapping out the value chain, leaving organizations to develop their own methodology balancing granular and high-level information. Although the Commission will publish guidelines on identifying adverse impacts, these won’t be available until six months before the rules apply. Therefore, companies should begin mapping their value chains immediately to avoid delays in implementing other due diligence steps.
The legislative text also stresses identifying general areas with the most severe and likely impacts before conducting detailed assessments. This process can be informed by value chain mapping completed under the CSRD as part of the double materiality assessment.
2. Recognize the Importance of Meaningful Stakeholder Engagement
CSDDD mandates companies to engage with stakeholders throughout the due diligence process, including unfamiliar groups like whistle-blowers, NGOs, and workers in the value chain, and adopt new communication methods with existing stakeholders.
Given the emphasis on meaningful engagement, companies must ensure interactive communication and be receptive to feedback, thus tailoring their approach to different groups’ needs to ensure timely, accessible, appropriate, and safe engagement.
However, companies might face several challenges in fulfilling this requirement. These include upskilling procurement and sales teams, addressing industry-wide challenges like language and accessibility barriers, and influencing supplier behaviour. The OECD Due Diligence Guidance for Responsible Business Conduct offers practical support for overcoming these difficulties.
3. Prioritize the Design and Implementation of a Climate Transition Plan
CSDDD is the first EU legislation that mandates the design and adoption of a climate transition plan, with national supervisors overseeing its implementation. This requirement pushes climate transition planning to a higher priority on corporate agendas.
If an organization discloses a transition plan under CSRD, it will comply with the CSDDD’s requirement to adopt a transition plan. However, companies must still implement this plan and update it annually to assess progress toward targets.
4. Adopt a Proactive Approach to Managing Sustainability-Related Risks
CSDDD requires companies to not only identify their environmental and human rights impacts but also address and monitor them continuously. Companies must transition from a static tick-box due diligence approach to a robust, risk-based, ongoing due diligence process based on proactive, insight-driven, and formalized quantitative mechanisms aligned with their risk appetite.
Many corporations will experience a steep learning curve in improving their ability to identify and assess impacts. According to Deloitte’s global Third-Party Risk Management (TPRM) survey, only 7% of 1,356 organizations believed they had mature processes for sustainability assessments aligned with their risk appetite.
Unlocking Opportunities and Generating Value
Addressing the CSDDD challenges and establishing robust human rights and environmental due diligence processes can yield significant benefits. Enhanced supply chain visibility can improve efficiency and profitability. Effective stakeholder engagement can boost resilience and trust, positioning companies favourably during disruptions. Upholding human rights and environmental protection can enhance sustainability credentials, differentiate companies from competitors, and attract new capital, talent, and customers.
Conclusion
The EU Corporate Sustainability Due Diligence Directive presents both challenges and opportunities for businesses. By proactively addressing the regulatory requirements, enhancing supply chain transparency, engaging meaningfully with stakeholders, prioritizing climate transition planning, and adopting a proactive approach to managing sustainability-related risks, companies can not only comply with the directive but also unlock value and strengthen their competitive position in the market.
