CSRD vs CSDDD: Where is the overlap?
On 24 May 2024 the Council of the European Union approved the Corporate Sustainability Due Diligence Directive (CSDDD), following months of negotiations between EU institutions and member states. The adoption of the CSDDD comes as companies are getting to grips with the Corporate Sustainability Reporting Directive (CSRD). The good news is that the CSRD and CSDDD share similar overarching aims – supporting companies in understanding and reducing negative impacts to society and the environment – and preparing for CSRD reporting will also help companies towards CSDDD compliance. Ultimately, the two Directives work in tandem to heighten the quality of reported information and the ambition of business strategies related to social and environmental sustainability.
That being said, the CSDDD will require companies to go beyond reporting and have impacts beyond the limited group of companies that is directly subject to the legislation. Companies must start anticipating these impacts now.
CSDDD vs CSRD: Distinct but complementary purposes
The CSRD is designed to standardise and improve the quality of environmental, social and governance information companies report to the public. It encompasses organisations’ material impacts, risks and opportunities and requires companies to share policies, targets and activities related to these issues.
This information facilitates stronger comparisons of companies with similar characteristics using sustainability performance as a differentiator. The CSRD only introduces mandatory reporting guidelines; it only indirectly requires companies to change or improve their management approaches for material ESG issues by giving stakeholders transparency about the company’s performance.
The CSDDD requires companies to implement specific due diligence processes for protecting human rights and the environment in their strategy and management approaches. It aims to hold companies accountable for business ethics and set a higher ground floor for acceptable business practice.
Companies must demonstrate efforts to assess, prevent, remediate and publicly disclose negative impacts within their upstream and downstream chain of activities. Best practices such as Board oversight and approval of supply chain due diligence, stakeholder dialogue and some specific targets for outcomes are also required under the CSDDD. For instance, organisations are required to create a transition plan in line with a a 1.5°C global warming scenario.
CSDDD: Smaller scope but significant spillover effects along supply chains
After the final legislative changes, the CSDDD applies to a much smaller group of companies than the CSRD (see figure). However, many more companies will be indirectly affected, because the large companies that need to comply with the CSDDD will rely on their supply chain partners to share due diligence information and support implementation of actions to mitigate negative impacts. Companies operating in major global supply chains would therefore do well to review whether their supply chain due diligence practices are robust.
Reporting timeline comparison
Finding synergies between the CSRD and CSDDD
Companies can find important synergies between their CSRD preparation and approach to CSDDD compliance. When addressed in tandem, companies can both enhance reported information and improve the quality of internal management approaches for addressing environmental and human rights issues.
- Impact assessments
Environmental and human rights impacts in the value chain identified in the double materiality assessment for the CSRD are good starting points for evaluating impacts and risks for the CSDDD. However, a few key distinctions are worth noting: the CSDDD only considers only key adverse impacts, while CSRD includes the identification of both positive and negative impacts as well as financial risks and opportunities, all of which are subject to materiality thresholds. Beyond impact identification, both the CSRD and the CSDDD also require detailed descriptions of the processes used to manage the most significant impacts.
- Upstream and downstream activities
Companies need to have a detailed understanding of their value chain for both directives, and value chain mapping builds this understanding. Though they use differing terminology, both the CSRD’s inclusion of the full value chain and the CSDDD’s threshold for including the chain of activities require businesses to assess impacts beyond their own operations. The main difference is that CSRD includes the full value chain (subject to materiality) and CSDDD applies to upstream supply chain and downstream transport, distribution and storage, but not end-consumer impacts.
- Transition plans
CSDDD requires companies to develop a transition plan for reducing climate change impacts to limit global warming to 1.5°C with detail in 5-year increments. Similarly, CSRD includes mandatory reporting of transition plans (ESRS E1-1), as well. Both focus on the governance, financial investment and actions taken to implement the plan.
- Reporting
EFRAG explicitly states no double reporting for CSDDD and CSRD is necessary. Companies can report information for both directives together in their sustainability statements.
Integrating CSRD and CSDDD preparation into a single initiative
By understanding that the CSRD and CSDDD have been harmonised to share key elements, companies can avoid double work. Early identification of key areas of alignment between the two directives can help companies fulfil requirements for both at the same time. Mapping exercises, materiality assessments, transition plans and management strategies can all be leveraged to advance towards the goals of both directives in tandem. These elements can work together in a unified cycle of continuous sustainability performance improvement that creates value for the business, as well as checks all of the boxes for regulatory purposes.
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Author: Sytze Dijkstra, Netherlands Country Manager, Simply Sustainable