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.
Responsiblepurchasing 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.
Stakeholder engagement.
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.
As the urgency to combat climate change continues to grow, so does the importance of having a robust and credible climate strategy and net zero roadmap. Getting this right is key to the success of your organisation’s wider corporate sustainability strategy. Here are my 10 top tips for developing, implementing and evolving your climate strategy and driving meaningful change within your business.
1. Make the business case
Before developing your climate strategy, make sure your key stakeholders understand the business case for it. Use stakeholder mapping and analysis to find your champions and hear from your challengers. Clarify the benefits for the planet, and also for your business — gain competitive advantage, improve reputation, meet customer and investor expectations and retain and attract employees.
2. It’s all about the data!
Your net zero roadmap is only as robust as your greenhouse gas (GHG) emissions inventory. And your GHG inventory is only as accurate and complete as the underlying data — such as energy consumption, travel, supply chain and waste data. Improving your source data gathering, verifying, and storing processes is essential to an accurate and reliable climate strategy.
3. Understand the science
A solid grasp of climate science is key when developing your net zero roadmap and overall climate strategy. Stay informed about the latest research, frameworks, trends, and projections to make informed decisions, align to reporting requirements and set science-based goals.
4. Set ambitious, but realistic goals
Establish clear and measurable targets aligned with the latest science-based criteria. Aim for ambitious GHG emissions reductions while ensuring feasibility within your organisation based on capabilities and resources.
5. Engage your stakeholders throughout the process
You can’t do this alone. Effective climate action requires collaboration with stakeholders across your full value chain. Engage leaders, employees, suppliers, customers and partners to gain and maintain buy-in, gather diverse perspectives, and combine collective expertise. Fostering cooperation and setting shared goals will support you to implement your plan and successfully manage change.
6. Start with quick wins
This may sound like an obvious one, but focusing on the quick wins should show return on investment and positive results early on. This will help with stakeholder buy-in and future requests for resourcing and investment as you scale up the programme and shift the focus to longer-term initiatives.
7. Prioritise renewable energy alongside energy efficiency
Transitioning to renewable energy sources is the foundation of any climate strategy. Explore opportunities to invest in and generate new solar, wind, hydro, or other renewable energy, alongside procuring renewable energy contracts. In parallel, implement measures to optimise energy efficiency. Upgrade equipment, improve insulation, and adopt smart technologies to reduce energy consumption and costs.
8. Embrace innovation
Encourage innovation and creativity to deliver solutions for your climate challenges and develop opportunities. Embrace emerging technologies, explore alternative materials, and think outside the box — for example, by partnering with disruptors and peers, and testing out new business models.
9. Manage your climate-related risks
Climate change brings risks and uncertainties — such as extreme weather events, resource scarcity and supply chain disruptions. Assess, monitor and mitigate your climate-related risks as part of your wider risk management procedures, resilience planning and adaptation measures.
10. Stay agile and adapt
Establish robust monitoring and reporting mechanisms to track your climate goal progress. This will help you evaluate performance and identify areas for improvement. Remember that your net zero roadmap is not a static plan until you achieve your net zero target. As legislation, frameworks and climate science evolve, so will your strategy. Keep agile and adapt your strategy as needed.
With a rise in sustainability and ESG related language in marketing communications, regulators are cracking down. But will the new greenwashing legislation be effective?
In 2021, for the first time, greenwashing was the focus of the European Commission’s annual online “sweep” to identify breaches of EU law. Forty-two percent of “green” claims gave authorities reason to believe they may be false or deceptive, and 59% of claims were not backed up with any evidence. These results led the EU Justice Commissioner Didier Reynders to state that many firms “pull the wool over consumers’ eyes with vague, false or exaggerated claims” when it comes to sustainability. It isn’t all that black and white, however: at best, the lines of communication between sustainability and marketing functions are poor, and at worst, some companies are wilfully misusing sustainability claims to increase sales.
Indeed, there is evidence to suggest marketers aren’t deliberately indulging in greenwashing: the 2021 Chartered Institute of Marketing survey found that half of marketers were wary of working on sustainability marketing campaigns, with many citing “fear of being accused of greenwashing by consumers”, and yet three quarters had done so without any training. This is a justified fear: YouGov polls show Volkswagen’s reputation has yet to recover from its 2015 emissions scandal, even after fines, brand redesigns, and a product overhaul. There is thus a recognition that misusing sustainability claims could lead to significant and lasting reputational damage, but that the industry currently lacks capacity and training around the responsible use of environmental and social messaging. That tension has to be resolved to enable companies and their marketers to use sustainability messaging responsibly and comply with emerging requirements.
With all this in mind, let’s examine where the legislation seems to be going.
International responses
National governments have started to react. Earlier in June, the British Advertising and Standards Authority banned a Tesco advert making the unsubstantiated claim its veggie burgers were “better for the planet”. In May, German police raided Deutsche Bank on the basis it was exaggerating the sustainable credentials of certain investments. In the U.S., the Securities and Exchange Commission took Brazilian mining company Vale to court in April for its misleading ESG claims regarding its dams, at the same time as the Federal Trade Commission was handing out fines to Wal-Mart and Kohl’s for deceptively marketing products as being made from bamboo.
While these regulators are using existing rules to target greenwashing, other countries are introducing laws specifically to combat it. In April, French president Emmanuel Macron passed a decree stating that, from 2023, organisations found to be greenwashing could face fines amounting 80% of the costs of the false promotional campaign, with an obligation to publish corrections on billboards, in the media, and on company websites.
Given individuals and investors can’t be expected to verify the green credentials of products and funds, there is a growing consensus that relevant national watchdogs — whether in finance or advertising — need to operate within a universal framework to be effective. The EU is spearheading the largest of these efforts.
The EU steps in
In February this year, the European Securities and Markets Authority released its Sustainable Finance Roadmap 2022-2024, which identifies tackling greenwashing and promoting transparency as the first of three key priorities for sustainable finance. It plans to create a legislative regime to clearly set out the legality or illegality of certain market practices.
The EU Commission went a step further in March, when it proposed Directive amendments that would ban certain greenwashing practices outright — a step up from the current rules, which consider accusations of greenwashing on a case-by-case basis when they are found to negatively affect consumers. This would be accompanied by a set standard that brands would have to meet to make certain environmental claims. The Commission’s proposal hints that this standard could be the provision of “reliable, comparable, and verifiable information”, which it claims would facilitate enforcement by consumer protection authorities such as the watchdogs of member states.
Will it work?
All of this seems to be a step in the right direction. But with the EU itself recently itself being accused of greenwashing by including gas and nuclear in its definition of green energy, will new legislation have the teeth it needs to be effective? There are other potential issues to consider here too.
Firstly, approaching the issue from a consumer rights perspective shifts the onus of action to make informed purchases onto the consumer. While it’s essential to give people more information on the products and services they buy — and indeed there is some evidence that sustainability credentials are starting to impact consumer choice — some might argue there is a risk of this taking the focus away from more significant systemic issues. The elimination of greenwashing won’t remove the other drivers of consumer choice such as cost, familiarity and quality. What it might do is expose how far many companies still have to go in shifting their overall product and service offering to something genuinely more sustainable. In other words, even if the legislation works, will it really make a difference to the overall impact companies have on people and planet?
Secondly, enforcement is likely to prove a significant challenge. Whereas some claims can be relatively easily verified — for example whether a product is made of 100% recycled plastic — others are much more complicated. The Commission aims to tackle this by blacklisting generic claims such “eco”, “green”, and “climate-friendly” where environmental excellence cannot be demonstrated. But not all misleading labels can be so neatly categorised. For example, should a company be unable to advertise its products as sustainable when it is temporarily not the case (a debate currently taking place in the UK where “free range” eggs have not been available due to avian flu)? This approach also fails to address the types of marketing and advertising that give the impression of sustainability without words: positive associations with the colour green, environmental and natural imagery, and even certain fonts.
It’s also likely that companies will find other words to replace those on the blacklist, such as when juice companies started using the phrases “freshly bottled” and even “squeezed fresh” when the U.S. Food and Drug Administration limited the use of “freshly squeezed” in the 1990s. Altogether, this poses the question as to the suitability of the law as a mechanism to tackle greenwashing.
What can companies do?
So, what can companies do to ensure their marketers and advertisers use sustainability messaging more responsibly?
Better communication with sustainability specialists is a key way to keep abreast of legislation surrounding environmental and social messaging. This is a very fast-moving space — just last week the United Nations backed a crackdown on climate change-related advertising — and keeping up is essential to not fall foul of ever-heightening requirements. With the correct guidance, firms can build capacity for marketers to work with the spirit of emerging legislation rather than trying to find loopholes that may backfire. This responsible use of messaging is likely to strike a chord with consumers who increasingly value honest, transparent brands.
Ultimately, there are two main courses of action for companies. Firstly, get used to always backing up claims with facts. Make sure you are collecting accurate data, using unbiased terminology when analysing it, and not cherry-picking narrow instances to be publicised. Secondly, if you feel the temptation to greenwash, consider investing the money you would have spent on misleading marketing into creating more sustainable offerings — products and services your company can genuinely be proud of and that don’t require exaggerated claims.
In recent years, stakeholder demand for environmental, social and governance (ESG) information has increased exponentially. Investors need clear, comprehensive, and comparable information to make informed investment decisions. Customers are paying progressively more attention to how their purchases impact people and the planet.
In response, attempts to produce — and increasingly to mandate — various sustainability-related reporting frameworks and standards have also multiplied. This has led to a growing set of overlapping frameworks that are often confusing and resource-intensive to engage with. Could the newly formed International Sustainability Standards Board (ISSB) reduce duplication and provide much needed clarity, or will it simply exacerbate the burden on companies already struggling to navigate the disclosure landscape?
We’re left with a vast patchwork of frameworks and standards, all with varying parameters:
Global or country-specific
Mandatory or voluntary
Finance-focused or broader
Covering all aspects of ESG or narrower
Aimed at one industry or multiple
Aimed at SMEs and / or large public companies
It’s pretty challenging to explain the current landscape of sustainability reporting standards in a clear, concise manner: it’s too complicated and there are far too many acronyms. How can businesses be expected to provide their stakeholders with clear, comparable and comprehensive ESG information when the task of simply choosing which frameworks to use is onerous, and the resources needed to gather the required information often seem disproportionate?
The strong drive for transparency and disclosure is certainly positive in itself, but the piecemeal way it’s happened over the last couple of decades is far from helpful. The need for a definitive alignment of standards is pressing.
New efforts to simplify
Arguably the most interesting recent development in the complex world of ESG disclosure standards is the creation of the ISSB, announced last year as an IFRS initiative, in collaboration with the leading group of voluntary standard-setters. The aim is to combine the existing frameworks to produce a comprehensive, global set of sustainability reporting standards.
There are several challenges that the ISSB will have to overcome in order to achieve this aim. First is the difficulty of a globally adopted framework – one study found that only the GRI can demonstrate widespread global implementation, with current use by 73% of G250 companies. Western Europe and North America generally dominate the ESG reporting landscape, despite being less populous and producing fewer emissions than the Asia-Oceania region. ESG is simply not a high priority in all countries, compounded by issues such as corruption and variable data quality. Global mandatory disclosures may simply not be successful unless supported by an effective global system of data verification.
In addition, the variation in global approaches to issues such as human rights can be controversial and politicised. Many companies operating across multiple markets already face political and cultural challenges when working to increase transparency. An effective global framework will need to accept and embrace these complex relationships and potentially recognise the strength of shared data and disclosures across groups of peers and mutual suppliers as a mechanism for moving the needle in a positive direction.
And what about small and medium enterprises (SMEs)? These companies make up around 90% of businesses globally, yet the vast majority of reporting standards are aimed at large and listed companies. While ESG information from SMEs is crucial to understanding the big picture of business sustainability, and to encourage good practice, the question of proportionality arises. Is it fair to request increasingly complex information from companies that may not have the resources to gather the necessary data? Perhaps the ISSB should consider having different disclosure requirements depending on the user – an approach currently under consideration for the SEC 10-K ESG Disclosure.
Reasons for optimism?
The ISSB has numerous challenges ahead if it is to produce a comprehensive set of standards for global sustainability reporting. There is, however, reason to be optimistic. Many major actors are supporting the ISSB, including the UN, the International Monetary Fund, G20 Finance Ministers, the World Economic Forum and IOSCO. The “building blocks” approach proposed for the ISSB, which accommodates for differing stakeholder views, will hopefully provide the necessary flexibility required to achieve its aim. It’s clear that any framework this ambitious will have to continually adapt to the plethora of differing global regions, stakeholders, industries and businesses. Let’s hope the ISSB can rise to the challenge.
I used to think the concept of materiality in sustainability-speak was rather hard to understand until I came across the concept of “double materiality” in the EU proposal for improvements to company reporting.
Is double-materiality significant or merely a bureaucratic oxymoron?
The answer lies in your point of view.
If you are an unreconstructed financial traditionalist, then the concept is something quite new and potentially disruptive.
If you’re a sustainability advocate, it’s heartwarming because the concept accelerates the cause for greater corporate responsibility, transparency and positive action.
Before understanding double materiality, it helps to know what single materiality is.
Traditional view
The Securities and Exchange Commission (SEC) is the US government regulatory agency that, among other duties, specifies what listed companies should report to investors. It defines materiality as the information “a reasonable person would consider important” when valuing an enterprise.
In practice, information is deemed material to a company’s financial stability and therefore its value to investors. For example, if the share price drops alarmingly because of, say, revelations of widespread corruption or a major accident. When BP’s Deepwater Horizon oil rig blew up in the Gulf of Mexico, the financial and reputational impact of the resulting oil spill had a material affect on the value of the business.
Small accidents or “traffic ticket” fines for pollution would not have the same commercial impact and would not be considered financially material. And until quite recently, the nature of BP’s core business – producing and marketing oil and gas – was not considered a material issue because it contributed to the prosperity of society and BP’s shareholders.
Sustainability view
Sustainability advocates have long argued that the negative impact of an enterprise on the planet and society should influence its value. To make their point, they borrowed the materiality term and devised ways to determine a new set of material issues that the financial community had long ignored as “externalities” (and mostly still do). For example, long before carbon began rising up the financial agenda, it was of great concern to other stakeholders worried about climate change. Stakeholders also fretted about other issues that the financial community ignored, such as human rights, diversity and impacts on nature.
The inclusion of “stakeholder” concerns resulted in the materiality matrix commonly found in sustainability reports. The matrix is plotted by establishing the relative importance of an issue to:
The company’s management
The company’s stakeholders
Plotting the matrix is more of an art than a science. It is usually done by consultants who (should) take a neutral view. Their process goes something like this (there are many variations on a theme):
Step 1. Stakeholders are asked what sustainability issues the company should be managing, and then to rate the relative importance of each issue. For example, on a scale of 1-10, encouraging diversity could be, for arguments sake, rated 9 while protecting biodiversity could be rated 5 by the stakeholders.
Step 2. The consultant (knowing the company), then rates the issues according to their potential importance to the company.
Step 3. Using two axes (importance to the company; importance to stakeholders) the issues are plotted. The top right quadrant contains the issues that are the most important to the company and its stakeholders. It is those topics that are considered material and which define the contents of the sustainability report.
What’s the double fuss?
Sustainability reporters rightly ask what the fuss is about because their concept of materiality broadly accounts for impacts on stakeholders (proxy for the planet) and impacts on the company. Is this not already double materiality, they ask?
Partly. But the important point here is that the concept of double materiality is aimed at the financial community, not the Sustainerati.
The regulators are saying that the traditional financial definition of materiality is pertinent but too narrow. They want reporters to acknowledge that longer-term issues, such as the impact of climate change on a company, are material to the value of an enterprise.
By promoting “double” materiality the regulators are asking companies and the financial community to acknowledge that a much broader range of issues and events affect an enterprise. The regulators are siding with sustainability advocates who have long argued this case. And what’s more, the actions of companies affect society and the environment too. The concept of double materiality acknowledges that interconnection – hence double.
Phew! What a long explanation, say the Sustainerati: that’s what we’ve been arguing for all along!
Sustainability advocates have got their way. Their view of materiality is (largely) being enshrined in regulations and will dictate what large companies are required to report to an increasingly interested financial community.
It may take a little while. But materiality is about to double.
