The Corporate Sustainability Due Diligence Directive (CSDDD) has sparked a whirlwind of change, leaving many businesses grappling with uncertainty. Rumours abound, and separating fact from fiction has become increasingly challenging. Large companies and SMEs alike fear drowning in paperwork, while concerns of overlap with the Corporate Sustainability Reporting Directive (CSRD) add to the confusion. As the regulatory landscape shifts, many are left wondering: What's the truth behind the CSDDD, and how will it really impact our operations?
Let's cut through the noise and tackle four common misconceptions head-on.
1. "CSDDD is Just Another Paperwork Directive with No Real Impact"
This couldn't be further from the truth. The CSDDD is not about creating more bureaucratic hurdles but about driving meaningful change in corporate behaviour and accountability.
Firstly, the directive aims to ensure a behavioural change through clear obligations. It's not merely about ticking boxes; it's about fundamentally altering how companies approach sustainability and due diligence in their operations and value chains.
Secondly, and perhaps most importantly, the CSDDD is designed to make a real impact on the ground. It does this through the introduction of civil liability measures. This means:
Ensuring respect for human rights and the environment becomes a legal obligation, not just a PR exercise.
Opening pathways for victims to seek remedy, giving teeth to the directive and providing recourse for those affected by corporate malpractice.
Contrary to popular belief, the CSDDD does not introduce new reporting obligations. Its focus is on action, not paperwork. By setting clear standards and expectations, it actually helps avoid regulatory fragmentation, providing a unified approach across the EU.
In essence, the CSDDD is about transforming how businesses operate, ensuring they take tangible steps to respect human rights and environmental standards throughout their value chains.
2. "There's Unnecessary Duplication with CSRD, Especially Regarding Climate Targets"
This misconception stems from a misunderstanding of how the CSDDD and CSRD interplay. While there is some overlap, particularly in areas like climate transition plans, these directives are designed to complement each other, not duplicate efforts.
Here's how it works:
If a company already reports a climate transition plan under CSRD, they're considered to meet the corresponding CSDDD obligation. There's no need to create a separate plan.
If a company doesn't currently report such a plan under CSRD, they'll need to adopt one to comply with CSDDD, which will then feed into their CSRD reporting.
It's crucial to understand that CSDDD goes beyond mere reporting. It requires companies to put their plans into effect and implement them. The goal is to ensure, through best efforts, compatibility with a sustainable economy and limitation of global warming to 1.5 degrees Celsius, in line with the Paris Agreement. The ultimate objective is net-zero emissions by 2050.
CSDDD's scope is comprehensive, covering all emissions (Scopes 1, 2, and 3). Companies will need to update annually on their progress compared to targets.
To ensure consistency and ease implementation, the EU Commission will publish practical guidance aligning CSDDD requirements with the European Sustainability Reporting Standards (ESRS) under CSRD.
3. "CSDDD Will Place a Very Heavy Burden on SMEs"
Indeed, this concern is partly true. While SMEs are not directly within the scope of CSDDD, they may experience indirect impacts when they are part of the value chain of large companies covered by the directive.
However, the CSDDD includes several provisions designed to support SMEs and protect them from unnecessary burdens:
Risk-based approach: Due diligence efforts will prioritise high-risk areas. This means fewer information requests for EU-based SMEs and those in countries with strong, well-enforced human rights and environmental standards.
Improved purchasing practices: Large companies will need to adapt their purchasing practices to prevent negative impacts. This includes ensuring fair wages, reasonable delivery times, favourable payment terms, and equitable price negotiations - changes that can benefit SMEs.
Support mechanisms: Companies within the CSDDD's scope are required to provide targeted and proportionate support to their SME business partners. This can include financial support and investments in the value chain.
Protection against burden-shifting: The directive safeguards against large companies unfairly shifting compliance burdens to SMEs. Contract terms with SME partners must be fair, reasonable, and non-discriminatory. The European Commission will publish guidelines on model contract clauses to ensure this.
Third-party verification costs: When third-party verification is used, the cost must be borne by the large company in scope, not the SME partner.
Information support: Member states and the EU Commission will provide information support to help SMEs navigate the new landscape.
Far from being a burden, CSDDD is designed to be one of the most SME-friendly pieces of legislation, aiming to keep the compliance burden at a minimum while fostering a more sustainable and equitable business environment.
4. "Financial Institutions Are Not in Scope"
This is a widespread misconception. Contrary to rumours suggesting that the finance sector was excluded, financial institutions are very much within the scope of CSDDD.
Here's the reality:
Financial institutions have no exception from the directive's requirements. They need to perform their due diligence duty on their upstream value chain, just like companies in other sectors.
They are also required to develop and implement a climate transition plan, aligning their activities with sustainability goals.
However, it's important to note that, like other companies, financial institutions' downstream value chain - their clients of financial services - is not currently covered by the directive. This is where most of the impact of the finance industry occurs.
Recognising the significance of this, the CSDDD includes a provision to reassess the coverage of client relationships for financial services. This reassessment is scheduled to take place two years after the directive's entry into force, which would be around 2026.
This approach allows for a phased implementation, giving financial institutions time to adapt while keeping the door open for more comprehensive coverage in the future.
The CSDDD marks a pivotal shift towards responsible business practices. As we've seen, it's not about bureaucracy, but driving meaningful change. Now is the time to prepare. Start by assessing your current practices, identifying gaps, and developing a roadmap for compliance. Engage with your value chain partners, especially SMEs, to ensure a collaborative approach. Remember, early preparation can turn compliance into a competitive advantage.
Need help navigating these changes? We are ready to assist you in implementing effective due diligence processes and creating robust sustainability strategies. Contact us today at info@beeaware-consulting.com or through our contact form to stay ahead of the curve and turn CSDDD requirements into opportunities for your business.
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