The law requires companies to look beyond their own activities, obtaining information about risks from subsidiaries, business partners and (in)direct suppliers. Examples of possible impacts to be identified and acted upon can be related to injustices such as child labour, environmental pollution and poor working conditions.
To whom does the CSDDD apply?
Throughout negotiations at a European level in recent months, the scope of the CSDDD has been much discussed and, eventually, has been significantly reduced. The result: the directive will apply to large companies with more than 1000 employees and a turnover of EUR 450 million. In the Netherlands, this concerns about 457 companies. European member states have 2 years to implement this law nationally, and the law will be phased in based on company size and turnover:
- Starting year 2027 for companies with more than 5000 employees and a turnover of 1500 million euros.
- Starting year 2028 for companies with more than 3000 employees and a turnover of 900 million euros.
- Starting year 2029 for companies with more than 1000 employees and a turnover of 450 million euros.
CSDDD in relation to CSRD
The CSDDD has a similar objective to the CSRD, namely, to increase transparency and create a sustainable economy within the EU. However, there is an important difference between the CSDDD and the CSRD. The CSDDD is not only a reporting obligation, but also requires an effort by companies to prevent and reduce injustices. When this effort is not met, companies may be held liable for the damage caused to humans and the environment and may have to pay compensation.
Companies not (yet) in scope cannot sit back and relax
Even though the dates of the CSDDD coming into effect still seem very far away; companies within scope are strongly advised to start scoping and mapping their value chain to subsequently carry out an impact assessment for the entire value chain, as these activities, as well as putting in place thorough due diligence processes following the impact assessment, can be a time-consuming process.
Even if a company does not fall within scope at the moment, it is importantto invest in value chain responsibility in areas such as human rights, the environment and nature (Human Rights and Environment Due Diligence, hereafter: HREDD). Increasingly, companies start to realise that it is a societal duty to ‘no longer look away’; that their customers, partners and other stakeholders (will) expect this from them. In addition, publications in the media of information about injustices taking place in an organization’s value chain may result in lasting reputational damage and even court cases.
Aside from the CSDDD, several countries have previously enacted legislation such as the German Supply Chain Act, the English Modern Slavery Act and the US Uyghur Forced Labour Prevention Act. The Dutch government has already signed a Manifest for Corporate Social Responsibility (2022-2025), which calls for the inclusion of value chain responsibility in the requirements of public procurement and tenders. In short, proactively engaging in value chain responsibility provides a competitive advantage, a positive or protected reputation with regards to sustainability and reduced corporate risks.
Additionally, several European laws contain components of value chain due diligence (such as the EU Taxonomy, the EUDR against deforestation and the SFDR). Finally, as already mentioned, the CSRD,explicitly states that ‘the assessment of the materiality of a negative impact is based on the due diligence process defined in the international instruments of the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises’ (ESRS 1 - paragraph 45).
Moreover, the CSRD also states that ‘Stakeholder engagement is at the heart of the continuous due diligence process of the company and the assessment of materiality with regard to sustainability’ (ESRS 1 - paragraph 24).
In other words:
Thorough due diligence throughout the chain is the basis for a proper double materiality analysis.
Benefits of insight into the chain
In addition to internal and external drivers that encourage both transparency and accountability within the value chain, there has long been a strong argument for starting activities in this area: it is good for the (financial) health of your company to have insight into your value chain:
- In addition to insight into possible positive and negative impacts, you also gain insight into new opportunities and risks related to the value chain, also in the commercial field.
- Inefficiencies in the value chain are exposed, and will result in optimisation and cost savings. In addition, the mitigation of negative impacts, such as pollution or waste, contributes to long-term cost savings.
- Transparency and sustainability are increasingly important to customers, investors and other stakeholders. Companies that take responsibility for their value chain have a better reputation and enjoy the trust of their customers.
- Lastly, taking responsibility opens doors to new business opportunities and partnerships that strengthen your company's position in the future.
How are you preparing for the CSDDD and chain responsibility?
Although the CSDDD will not take effect until 2027, many companies will have to start preparing and improving their due diligence processes and policies in accordance with OECD guidelines well in advance as this is a process that can span multiple years.
Would you like to know more about what Grant Thornton Impact House can do for your company in terms of CSDDD and value chain responsibility, and how you can best get started?
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