by Beth Sandford-Bondy | Nov 26, 2024 | Blog
The Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD) are new EU sustainability legislations with a lot in common — not just in name. Here’s a breakdown of key similarities and differences to help you skip the acronym headache.
What are CSDDD and CSRD?
CSDDD is a due diligence legislation requiring companies to identify, prevent, reduce and end negative human rights and environmental impacts in their operations and value chains. Companies also need to report annually on impacts and actions. Read our blog on everything you need to know about CSDDD.
CSRD is a reporting directive requiring companies to perform a double materiality assessment and produce an annual report disclosing the impacts, risks, opportunities and action plans associated with their material environmental, social and governance (ESG) issues.
What are the key similarities and differences between CSDDD and CSRD?
- Core focus
CSDDD focuses on doing — taking action to end adverse impacts. CSRD focuses on materiality and reporting — identifying and transparently disclosing impacts. But there is crossover. Like CSRD, CSDDD also requires annual reporting on adverse impacts and mitigation actions. And although CSRD is more focused on reporting than action, it does ask companies to disclose their climate plans in line with limiting global warming to 1.5°C.
- Scope and timeline
Both apply to large companies operating in the EU. CSRD applies to more companies, including EU-listed SMEs, and is already in effect. CSDDD is narrower — only large companies with 1,000+ employees and a net turnover of €450+ million are in scope. Companies must comply with CSDDD by 2027 at the earliest.
- Topic coverage
The topics covered by the legislations are broadly aligned. Both include human rights and environmental impacts and acknowledge their deeply interconnected nature. CSRD has the bigger picture in mind, covering issues related to governance, consumers and end-users. It also focuses on financial risks and opportunities, unlike CSDDD.
- Value chain coverage
Both cover companies’ own operations as well as upstream and downstream operations — inside and outside Europe. But CSDDD has a smaller downstream scope, only covering certain operations such as distribution, transport and storage. CSRD goes further and covers end-users and product disposal.
- Climate plans and reporting
Both ask for a climate transition plan aligned with limiting global warming to 1.5°C, and a publicly available annual report covering impacts and actions. CSRD’s reporting scope is more ambitious — see topic coverage above.
- Prioritisation
Both require companies to prioritise impacts based on severity and likelihood. But CSRD’s double materiality assessment means companies don’t have to report on issues that are less relevant to them. CSDDD still requires companies to address lower priority impacts after addressing their higher priority issues.
- Stakeholder engagement
Organisations need to continuously engage with internal and external stakeholders for both legislations. CSRD adopters must engage with stakeholders to perform the double materiality assessment and gather the necessary data. CSDDD requires stakeholder engagement throughout the due diligence process — from strategy-setting and training to providing a complaints procedure and monitoring due diligence measures.
- Targeted SME support
Unlike CSRD, CSDDD adopters must try to avoid overly burdening business partners who are small and medium-sized enterprise (SMEs). This could include offering training to SME suppliers or upgrading management systems, and where necessary providing financial support.
- Definitions
The definitions of impacts, risks and opportunities are aligned across the legislations. Impacts refer to potential and actual effects organisations have on the environment and society. Risks and opportunities refer to how sustainability issues could affect the organisation’s balance sheet.
What’s left to do if you already report to CSRD?
If you’re already on top of CSRD then you’re covered for CSDDD reporting and climate plan requirements. But there are some due diligence measures you’ll still need to carry out for CSDDD:
- Create a policy that ensures risk-based due diligence.
- Carry out in-depth assessments of individual suppliers in prioritised areas.
- Take measures to prevent and mitigate potential adverse impacts, and minimise and end actual adverse impacts.
- Provide a notification channel and complaints procedure.
- Monitor the effectiveness of due diligence measures and update them accordingly.
- Provide targeted and proportionate support for business partners who are SMEs, including non-discriminatory contractual assurances.
Context is ready to support you with all your CSRD and CSDDD needs — from devising strategies and conducting double materiality assessments, to writing policies and reports. If you would like to talk about your organisation’s needs, please get in touch via www.contextsustainability.com or helen.fisher@contexteurope.com.
by Beth Sandford-Bondy | Aug 29, 2024 | Blog
The Corporate Sustainability Due Diligence Directive (CSDDD) is the new kid on the block for many large companies active in the EU: here are the key things you need to know now.
What is CSDDD?
The CSDDD (CS3D) is a new EU human rights and environment due diligence legislation that applies to large companies operating in the EU. It requires processes be embedded in the business to identify, prevent, reduce, and end negative human rights and environmental impacts in their operations, subsidiaries, and value chains — both inside and outside Europe.
Is your company subject to CSDDD?
Two types of companies need to comply:
- EU-based companies with 1,000+ employees and a global net turnover of €450+ million.
- Non-EU-based companies with a net turnover of €450+ million in the EU.
Companies must comply by 2027, 2028, or 2029 depending on number of employees, global turnover amount, and whether they’re based in the EU or not.
What are the key steps to implementation?
1. Integrate due diligence into corporate policies
Make sure that due diligence is integrated into all relevant policies and risk management systems. You also need to have a specific policy that ensures risk-based due diligence.
2. Map your value chain and assess risks
It’s crucial to get an understanding of where your company’s actual and potential impacts lie. Start by mapping your value chain to identify areas with adverse impacts and risks, and prioritise them based on likelihood and severity. Then companies must carry out in-depth assessments of individual suppliers in prioritised areas.
3. Take measures to prevent, mitigate, and end adverse impacts
Preventing and ending adverse impacts on human rights and the environment is the core of the CSDDD. Companies should implement the following:
- Human rights and environmental strategies.
- Responsible purchasing practices — including assurances to comply with minimum standards, and supplier screening and assessments.
- Corrective measures and termination of business relationship as a last resort.
- Employee and supplier training.
- Targeted and proportionate support for business partners who are SMEs, including fair and non-discriminatory contractual assurances.
4. Provide a complaints procedure
Companies must provide a notification system which is accessible to potentially affected stakeholders and their representatives — including NGOs and human rights defenders, for example. The complaints procedure should be fair, publicly available, accessible, and transparent. Workers and their representatives must be informed of the procedure.
5. Monitor the effectiveness of due diligence measures
Periodically assessing your due diligence measures will help you see if they’re suitable and effective. Update your due diligence policy and measures as needed.
6. Publicly report impacts and due diligence processes
Compliance with CSRD means compliance with CSDDD reporting requirements. Companies must produce a publicly available annual statement on the potential and actual adverse impacts identified and due diligence measures taken.
7. Have a climate transition plan aligned with 1.5°C
Combat climate change with a transition plan aligned with limiting global warming to 1.5°C. If you’re complying with CSRD then your climate strategy is already ticked off the list.
What’s the connection to CSRD?
They are both new EU sustainability regulations covering social and environmental factors and applying to the operations and value chains of large companies. Both require public disclosure and a climate transition plan aligned with the Paris Agreement.
But while the CSDDD focuses on preventing and ending negative effects, the CSRD focuses on transparent disclosure.
For a more in-depth analysis of the overlap between CSRD and CSDDD, watch out for our upcoming blog on how they match up.
What can you do now to get started?
The first step is to familiarise yourselves with the CSDDD requirements to understand if, when and how you must comply. Assessing existing due diligence roles, policies and management systems will help you understand your gaps and establish any roles and responsibilities needed. The next step is to map your value chain to identify and prioritise risks based on likelihood and severity.
Once you understand where your biggest risks are, devise a plan to set up the necessary due diligence measures, engaging with both internal and external stakeholders. The strategy should include: in-depth supplier risk assessments, measures to prevent and mitigate impacts, grievance mechanisms, assessments to monitor due diligence processes, annual reporting, and a climate transition plan in line with the Paris Agreement.
Context is ready to support you with all your CSDDD needs — from value chain mapping and devising due diligence strategies, to writing policies and CSRD / CSDDD-aligned reports. If you would like to talk about your organisation’s needs, please get in touch via www.contextsustainability.com or helen.fisher@contexteurope.com.
by Helen Fisher | Mar 27, 2024 | Blog
Double materiality sits at the core of the new European sustainability reporting standards. The Corporate Sustainability Reporting Directive (CSRD) affects more than 50,000 companies, requiring them to disclose the impacts, risks and opportunities associated with environmental, social and governance issues, as well as what the company is doing to address those issues. For almost three-quarters of these companies, it is the first time they face mandatory reporting in the EU.
Unlike other sustainability reporting initiatives, which look at social and environmental impacts or the influence of sustainability issues on financial performance, companies falling within the scope of CSRD must combine both lenses, looking simultaneously inwards and outwards:
- Impact materiality looks from the inside out to assess the impact of the company’s business activities on stakeholders, society and the environment; and
- Financial materiality looks from the outside in to understand how external sustainability impacts could affect the company’s financial risks, opportunities and future profitability.
An effective and systematic process for assessing sustainability materiality is fundamental to align a company’s impact on society and the environment with strategic choices and financial performance. It ensures CSRD compliance, but also builds resilience, reputation and trust.
1. Understand context and define stakeholder engagement strategy
CSRD requires companies to look at the full value chain from raw material production to product use. The process starts with mapping all activities — upstream and downstream. This helps to define the internal and external stakeholders affected at each stage, as well as identify the groups who may have an impact on the organisation.
The perspectives of all these groups should inform the materiality assessment. However, you need to plan where and how to engage and involve them, and how to bring different groups of stakeholders together to build a holistic picture. For example, some people may be well-placed to identify the issues they think are important, but not to assess their financial impact on the company. Companies will also need to consult a broad group of stakeholders after assessing impacts, risks and opportunities (stage 4) to validate the final list of the most material topics.
2. Identify initial list of material sustainability matters
The next step is to compile a list of issues that are potentially relevant to the company. The European Sustainability Reporting Standards (ESRS) stipulates 10 cross-cutting environmental, social and governance topics that all companies must consider, including climate change, biodiversity loss and workers in the value chain. These include a series of sub-topics, e.g. working conditions, and sub-sub-topics, e.g. health and safety. You also need to take sector- and company-specific issues into account, which may include matters not directly covered by ESRS.
The list will be quite long at this stage. Subsequent steps help to identify those sustainability matters that are material to the organisation. Your company will only have to report on the material issues and not this longer list of issues.
3. Define impacts, risks and opportunities
Next, you need to define each sustainability matter in greater detail and assess it against a range of parameters.
What impact does the sustainability matter have on society or the environment? Is it a positive or negative impact? Over what timescale? Will the impact occur in the next year, next few years or over the longer term? Where does the impact occur, e.g. in the company’s supply chain, its operations or with customers? Is it already an issue (actual), or is it something that could happen if conditions change (potential)? For example, business expansion, such as construction of a new facility or increased raw material use following a new product launch, could lead to biodiversity loss if the move is not considered carefully from the outset.
Similarly, it is important to consider how the sustainability matter will affect your company, including whether it presents a risk or an opportunity, and whether it relates to the company’s direct operations or the wider value chain.
4. Assess impacts, risks and opportunities
Once you have a full understanding of the sustainability matters, impacts, risks and opportunities, you can start to assess their materiality.
Assessing impact materiality includes answering questions such as how many people are affected by an issue, whether the damage can be restored and at what cost. This helps to determine the scale, scope and irremediability of an issue. At this stage, research and industry reports can add supporting evidence. The information gathered could also help to shape future targets, demonstrating how the company is addressing key topics.
You will then need to understand how each issue is likely to affect company financial performance and to what extent (magnitude). Will it increase costs slightly or add significantly to the company’s cost-base, e.g. because key raw materials are less available, or the company will have to find new suppliers? Similarly, opportunities may cause a slight uptick in company fortunes or generate significant new revenues.
When assessing both impact and financial materiality, it is important to consider the likelihood of an issue arising and whether this might change based on future events. For example, could a change in regulation alter the risk profile, making a sustainability matter more important for your company.
5. Produce ranked list of sustainability matters
Now is the time to rank the sustainability matters based on the assessment of the impacts, risks and opportunities and to narrow down the issues that are material to the organisation. Up to now you have assessed each issue’s impacts, risks and opportunities on a range of different parameters. These now need to be combined to create a single view of an issue’s importance. A sustainability matter meets the criteria of double materiality if it is significant in terms of impact materiality, financial materiality, or a combination of both.
You will also need to determine the materiality threshold or cut-off point to split the list into material issues and those that are not material for the company.
It can be helpful at this stage to bring all stakeholders back together to review the list and ensure that issues have come out in the right order. Does it make sense that biodiversity loss sits above climate?
6. Produce materiality matrix and overview
Companies need to report on the prioritised list of material issues. There are no requirements on format within the CSRD; the list can be presented in a traditional materiality matrix or table. That said, it can be helpful to plot the assessment on a materiality matrix, especially to present and explain the material issues to stakeholders.
7. Disclose measures to manage environmental and societal impacts
Under CSRD, your company will be required to report on the outcomes of your double materiality assessment and the process used to create it.
You will also need to explain how you are addressing each of the issues identified. This includes detailing the measures and targets you have put in place to reduce impacts, mitigate risks and capitalise on opportunities, as well as the underlying policies and processes needed to achieve your goals.
Following these clear and logical steps will put you in a good position to report and comply with the requirements.
Context supports companies to assess materiality and develop, communicate and implement effective sustainability strategies. If you’d like to chat about your organisation’s needs, please get in touch via www.contextsustainability.com or helen.fisher@contexteurope.com.
Read our earlier blog on double materiality here.
