How companies can gear up for CSDDD compliance by 2027
The Corporate Sustainability Due Diligence Directive (CSDDD) is poised to reshape the European corporate landscape significantly.
According to Position Green, set to be enforced 20 days following its announcement in the Official Journal of the European Union, Member States are tasked with embedding the Directive into national legislation within two years.
Companies will then have a year to align before the directive takes full effect, rolling out gradually over three to five years post-implementation. This timeline indicates that the initial wave of compliance could kick off as early as the second or third quarter of 2027.
The CSDDD will significantly affect foreign companies with substantial operations in the EU. Specifically, foreign entities with an annual net turnover exceeding €450m within the EU will come under this directive. This applies to both the entities themselves and any EU-established affiliates that meet this financial threshold. Importantly, the directive does not set employee number stipulations for these foreign companies.
As suppliers to entities impacted by the CSDDD, businesses must prepare for enhanced scrutiny and engagement. Companies will initially require suppliers to disclose how they handle human rights risks within their operations. This is part of a broader risk assessment aimed at identifying potential issues within the supply chain. Depending on the findings, companies may engage in more in-depth activities with suppliers deemed at higher risk, which could include surveys, detailed discussions, and on-site evaluations.
Guidelines for assessing human rights and environmental risks are well established, with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights providing a robust framework. These guidelines are crucial for companies to effectively scope risks not only within their direct operations but across their entire chain of activities.
Whether addressing risks in direct operations or across the value chain, companies are advised to maintain a consistent approach to due diligence. The expectations are notably higher for direct operations due to greater control over processes and easier access to involved stakeholders.
The CSDDD defines ‘chain of activities’ more narrowly than the ‘value chain’ as understood under the Corporate Sustainability Reporting Directive (CSRD). The CSDDD’s scope is limited to direct activities such as distribution and storage handled by immediate business partners and excludes any activities related to controlled exports like weapons and munitions.
Knowledge and methodologies developed under the CSRD and the European Sustainability Reporting Standards (ESRS) can be instrumental in preparing for the CSDDD. While these provide a starting point for risk identification and assessment, the CSDDD demands more detailed and specific engagement and assessment, particularly in mapping and engaging stakeholders throughout the value chain.
The extent of integration of CSRD’s double materiality assessments into CSDDD compliance efforts will vary. Although these assessments can identify potential impact areas, the CSDDD requires a more thorough examination and engagement strategy concerning those areas identified as having significant adverse impacts.
