Legislators within the European Union have been busy for several years, working on an overhaul of sustainability reporting and due diligence. The Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) being just two examples of the work regulators are undertaking to improve sustainability, transparency and the impact organisations have on global supply chains.
This short blog looks at the differences and relationship between due diligence and disclosure requirements defined within CSDDD and CSRD as well as some of the key requirements associated with the legislation.
What is the CSDDD?
The CSDDD requires companies to take responsibility for negative human rights and environmental impacts associated with their activities, using due diligence as a means of identifying negative impacts. The EU-wide Directive will compel specific EU and non-EU companies to establish risk-based due diligence processes which assess, identify, mitigate and report on adverse human rights and environmental impacts in their operations, subsidiaries and supply chains.
What is the CSRD?
The CSRD aims at broadening the scope of a previous sustainability reporting directive, the Non-Financial Reporting Directive (NFRD) whilst also improving the standardisation and transparency of sustainability reporting. Under the disclosure framework, companies will be required to report on their social and environmental impacts including making considerations for their upstream and downstream value chain.
Why the need for two Directives?
It is fair that there are several similarities between the two Directives, both are broadly aligned with recognised international guidance or agreements including the OECD Guidelines for Multinational Enterprises, UN Guiding Principles on Business and Human Rights and the Paris Agreement on Climate Change. Both Directives also share similar aims of reducing the social and environmental impact associated with business operations and increasing transparency. There are however some differences in the intended output or consequences of each.
Broadly speaking the CSRD aims to standardise sustainability-related reporting whilst also increasing the transparency of the reports that external stakeholders may access. It sets a clear reporting framework which organisations are required to disclose against. Disclosures will also be subject to a form of assurance assessment to assess the veracity of the information within the report.
The CSDDD obligates companies to introduce steps to assess and improve the sustainability performance of their organisation and their supply chains. Companies must undertake due diligence steps which are proportionate to the context of their operations and their supply chains. It is directly aimed at identifying and mitigating any environmentally or socially harmful impacts associated with a company’s activities.
It could be argued that the CSDDD was the more natural predecessor of CSRD, providing organisations with an obligation to identify the social and environmental consequences of their activities and report on them. Ultimately though, both the CSRD and CSDDD place obligations on an organisation to consider and report on their environmental and social impact including steps that have been introduced to address issues.