The CSDDD: Explained
The Corporate Sustainability Due Diligence Directive (CSDDD) concerns companies’ responsibilities regarding environmental and human rights impacts caused by their decision-making. This includes sustainable and responsible corporate behaviour throughout global value chains.
Companies will have to identify – and prevent, end or mitigate adverse impacts of – their activities on human rights and on the environment. Furthermore, large companies will be required to align their business strategy with the Paris Agreement limiting global warming to 1.5 °C.
This directive will allow for more transparency for consumers and investors and provide legal certainty for businesses.
The directive has been built upon the OECD due diligence guidance in 6 stages:
Integrating due diligence into companies’ policies and management systems
Identify & assess actual or potential adverse impacts
Cease, prevent or mitigate adverse impacts
Monitor the effectiveness of the due diligence policies and measures
Publicly communicating how impacts are addressed
Establish and maintain a complaints procedure
Which companies will be affected by CSDDD?
The CSDDD’s due diligence obligations would apply to the following large EU and non-EU companies:
Within EU:
- Group 1: All EU limited liability companies with more than 500 employees and a net worldwide turnover of more than €150 million will be required to report on their due diligence matters.
- Group 2: Other companies operating in defined high-impact sectors (including the textile industry) with more than 250 employees and a net turnover of €40 million worldwide and more will be required to publish an annual statement on their due diligence matters on their website. For these companies, rules will start to apply two years later than for group 1.
Outside EU:
Companies that are active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU. Although there is only a small amount of EU business that falls under this scope, SMEs will also be impacted when they have an established business relationship with a large company (for instance, if they are part of its value chain).
When will the CSDDD come into force?
The CSDDD is still at an early stage, and no concrete timeline has been published yet. We expect more information on the timelines by the end of this year. Once the CSDDD is adopted, companies will have around three years to prepare.
Similar legislation in the US and the UK
Similar reporting legislations are being introduced in the US and the UK:
US: Securities and Exchange Commission (SEC) proposed a new set of rules on climate-related disclosures for greater transparency for investors in March 2022.
The SEC requires companies to disclose:
- Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook.
- The registrant’s governance of climate-related risks and relevant risk management processes.
- The registrant’s greenhouse gas (GHG) emissions, which, for accelerated and large accelerated filers and with respect to certain emissions, would be subject to assurance.
- Certain climate-related financial statement metrics and related disclosures in a note to its audited financial statements.
- Information about climate-related targets and goals, and transition plan, if any
Which companies will be affected by SEC climate-related requirements?
The SEC’s proposal applies to all SEC registrants including foreign private issuers, even those with no publicly listed equities.
When will it come into force?
Scope 1 & 2 emissions:
Large accelerated filers: reporting in 2024 on 2023 data
Accelerated filers, non-accelerated filers: reporting in 2025 on 2024 data
Small reporting companies: reporting in 2026 on 2025 data
Scope 3 emissions:
Large accelerated filers: reporting in 2025 on 2024 data
Accelerated filers, non-accelerated filers: reporting in 2026 on 2025 data
Small reporting companies: N/A
UK: In 2019 the UK government committed in law to net-zero greenhouse gas emissions by 2050. This transition must be supported by a significant shift of investment into sustainable projects and green technology. The government published a Roadmap for Greening Finance in 2022 aiming for the integration of environmental factors in decision-making.
The roadmap has three phases:
Informing investors and consumers: ensuring decision-useful information on sustainability is available.
Acting on the information: mainstreaming sustainability information into business and financial decisions.
Shifting financial flows: across the economy to align with the national net-zero commitment and nature-positive economy.
The roadmap is still under construction and aims to implement strong regulations, such as:
- The Task Force on Climate-Related Financial Disclosures (TCFD) provides recommendations for disclosing information about the risks and opportunities of climate change and will be mandatory by 2025.
- New Sustainability Disclosure Requirements will be introduced built on the TCFD, aiming to create an integrated framework for disclosures on sustainability across the economy.
- Development of the UK Green Taxonomy setting out criteria to define environmentally sustainable economic activities following six environmental objectives: climate change mitigation and adaptation, protection of water and marine resources, circular economy, pollution, and biodiversity.
These directives are not directly linked to the textile industry, however companies will be required to comply and align with the requirements. These directives are still in construction and at an early stage, new publications and modifications are expected in the next months and over 2023, for general and sector-specific requirements.
For the CSRD, new draft papers are expected in 2023 including sector-specific requirements for the textile industry. The EU taxonomy is foreseen to publish the four other objectives by the end of this year, in which the textile industry is expected to be in the economic activities contributing to achieve these four objectives.
Sources
CSRD:
EU Taxonomy:
CSDDD:
SEC:
Greening finance: