A business coexists with the environment and society throughout its value chain. With growing environmental and societal concerns, a business plays a major role in being a champion for sustainable practices. No business can easily thrive and succeed without its resources and human capital; to uphold these two can take a company closer to sustainable development.
Corporate sustainability due diligence holds companies responsible for the protection of the environment and for human rights. In this process, a company identifies, prevents, and mitigates their direct and indirect impact on the environment and society throughout their operations. This ensures their activities progress towards sustainability as they minimize negative impacts on people and the planet.
Due diligence is an integral practice that should be undertaken by businesses to better understand what they can do to progress closer to their sustainability goals. Through due diligence, a business can devise new strategies and changes to their operations, while reducing their harmful activities on the environment and on people and eventually, improving their brand reputation and taking part in global sustainable development.
Yet to ensure sustainability due diligence is integrated into a company’s risk management plan, a stronger influence may be required.
To ensure businesses practice sustainability and remain accountable for their actions, the EU developed the Corporate Sustainability Due Diligence Directive (CSDDD). The CSDDD requires companies to address and report human rights and environmental risks and impacts stemming from operations across the value chain, thus also considering the impact brought about by their suppliers, distributors, and other third parties.
Provisionally agreed at a political level last December 2023, the CSDDD is a new entrant to the laws that fall under the European Green Deal, which reshapes corporate sustainability governance in response to global challenges and needs. Previous laws include the Corporate Sustainability Reporting Directive (CSRD) and the Taxonomy Regulation. With the CSDDD currently being finalized, the corporate sustainability landscape will experience great changes spanning across a company’s value chain and stretching out to global supply chains.
Who has to comply with the CSDDD?
The CSDDD has a wide scope, ranging from large companies to SMEs under high-risk industries or sectors. Generally, EU-based large companies would have to comply with the CSDDD if they have more than 500 employees and a worldwide turnover above €150 million.
Non-EU companies may also be required to comply if they generate a net turnover over €150 million in the EU, three years from the entry into force of the directive.
If a company fails to comply with the CSDDD, financial penalties may be imposed. If a fine is not paid, a penalty of up to 5% of the company’s net turnover will occur. Businesses may also have to terminate relationships with partners that have negative environmental or social impacts that cannot be mitigated, thus altering stakeholder relationships and overall business operations of both parties.
Enforcing the CSDDD can redesign the way businesses run as it looks closely into the adverse impact they cause across their operations, subsidiaries, and supply chains. The CSDDD holds companies liable for their performance and strictly embeds sustainability due diligence at an era where sustainability is growing to be a top concern and priority for stakeholders, financial institutions, and the business itself.
In complying with the directive, a business has to conduct due diligence to identify potential and present adverse impacts. These could range from harmful environmental activities such as deforestation, environmental degradation, pollution, and loss of biodiversity to human rights concerns such as child labor, slavery, exploitation, health and safety in the workplace, and the protection of indigenous peoples. Identifying these risks and impacts should also span the value chain, both upstream and downstream. With this, a business must look into internal and external elements such as sales, production and manufacturing, transportation and logistics, procurement and supply chain, and end-of-life activities like waste disposal and management.
After identifying the risks and current harms caused by their activities, strategies must be made to prevent, mitigate, and stop these actions. Risk management plans must be created or revised to ensure a business upholds sustainable practices and minimizes their harmful impact on people and the environment. In the occurrence of current practices leading to adverse impacts, a business must take action to eliminate this problem, else face consequences such as civil liability or financial losses.
Yet the CSDDD doesn’t just focus on sustainability due diligence and strengthening their risk management plans. The CSDDD also puts emphasis on the urgent need towards climate action. Once the CSDDD is in effect, businesses are to reconfigure their strategies to cooperate with the Paris Agreement of keeping global warming to 1.5°C. Through the CSDDD, a business is compelled to commit to reduce emissions and target net zero.
With the CSDDD putting value on environmental protection and human rights, stakeholder management is then given greater relevance into the success of a business. Through engaging with stakeholders, a company can further assess their impact and take action towards growing concerns. The CSDDD draws importance on the need for grievance mechanisms and resolution in order for laborers, and other affected stakeholders to air their concerns and issues that are detrimental to society and the environment and pull the business further away from becoming sustainable.
Practicing corporate sustainability due diligence is not just identifying, preventing, and mitigating these risks and impacts. Due diligence also requires transparency and the CSDDD requires companies to disclose their results and response in their sustainability reports.
The CSDDD is still being finalized and may take into effect by 2025. This gives businesses ample time to prepare for compliance requirements and to embed sustainability due diligence into their strategy and risk management plans. Yet even without the CSDDD, a business can still apply this on their own initiative.
Sustainability due diligence is increasingly becoming an integral part of the way we do business and through the CSDDD, its enforcement can reshape global operations. Despite the CSDDD being directed towards EU-based companies and large companies with a strong presence in the EU, businesses across the world can still be impacted by the directive, especially in developing countries where exploitation may occur in manufacturing companies and environmental and social concerns may arise while sourcing for raw materials. With businesses potentially cutting ties with stakeholders engaged in harmful activities, these suppliers may experience losses and thus will have to adapt and steer their practices towards something more sustainable.
The CSDDD is a bold initiative for global sustainable development. Amidst the challenges that may arise in restructuring strategies and operations, and connecting with stakeholders and affected communities, the CSDDD drives businesses to establish concrete plans and take immediate action for sustainability, pushing companies to shift out of their planning stages and head towards implementation. Through sustainability due diligence, a business can become a champion for people and the planet.
At Keslio, we are deeply passionate about sustainability, equipping us with the expertise and extensive network needed to guide clients through their sustainability journey effectively and efficiently. Our expertise is particularly valuable for companies looking to embed sustainability practices into their businesses and investors looking to integrate ESG and impact into investment portfolios. To learn more about how Keslio can assist your organization on its sustainability journey, please don't hesitate to get in touch with us.
