How companies can gear up for CSDDD compliance by 2027

The Corporate Sustainability Due Diligence Directive (CSDDD) is set to have a profound impact on the corporate landscape across Europe.

Following its announcement in the Official Journal of the European Union, the CSDDD will become enforceable within 20 days. Member States are required to integrate the directive into their national legislation within two years from this date. Companies will then have an additional year to align with the requirements before the directive comes into full effect. The implementation will be gradual, spanning over three to five years, suggesting initial compliance efforts may commence as early as the second or third quarter of 2027.

Foreign companies with substantial operations in the EU will be significantly affected by the CSDDD. Specifically, entities with an annual net turnover exceeding €450 million within the EU, including their EU-established affiliates meeting this financial threshold, will fall under the directive’s purview. Notably, the directive does not specify minimum employee thresholds for these foreign entities.

Businesses serving as suppliers to entities impacted by the CSDDD must prepare for heightened scrutiny and engagement. Initial requirements will focus on suppliers disclosing their approaches to managing human rights risks within their operations. This disclosure is part of a broader risk assessment aimed at identifying potential issues throughout the supply chain. Depending on the assessment outcomes, deeper engagement activities with higher-risk suppliers may include surveys, detailed discussions, and on-site evaluations.

The CSDDD draws on established guidelines for assessing human rights and environmental risks, such as the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. These frameworks are essential for effectively evaluating risks not only within companies’ direct operations but also across their entire spectrum of activities.

Consistency in due diligence practices is emphasized, particularly for operations where companies have greater control over processes and direct access to stakeholders. The CSDDD defines the ‘chain of activities’ more narrowly than the ‘value chain’ under the Corporate Sustainability Reporting Directive (CSRD). It focuses on immediate business partner activities like distribution and storage, excluding controlled export activities such as weapons and munitions.

The knowledge and methodologies developed under the CSRD and the European Sustainability Reporting Standards (ESRS) will be crucial in preparing for CSDDD compliance. However, the directive necessitates more detailed and specific engagement and assessment practices, particularly in stakeholder mapping and involvement across the value chain.

While the CSRD’s double materiality assessments can highlight potential impact areas, CSDDD compliance demands a deeper examination and strategic engagement concerning areas identified as having significant adverse impacts. As companies prepare for the CSDDD rollout, aligning with these rigorous standards will be essential to navigate the evolving regulatory landscape effectively.

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Source: fintech.global

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