CSRD vs CSDDD: Two Paths, One Goal for Corporate Responsibility

The European Union's Corporate Sustainability Due Diligence Directive (CSDDD) and Corporate Sustainability Reporting Directive (CSRD) are two landmark regulations aimed at enhancing corporate accountability and transparency in sustainability matters. While they share common goals, these directives have distinct focuses, scopes, and implementation timelines. Understanding their differences and overlaps is crucial for companies operating in or with the EU.

 

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Scope and Applicability of CSDDD and CSRD

The CSRD has a broader scope, affecting approximately 50,000 companies. It applies to all large EU companies that meet at least two of these criteria: 

• Over 250 employees
• €40 million in net turnover
• €20 million in total assets 

Additionally, it encompasses all EU-listed companies, except listed micro-enterprises, and extends its reach to non-EU companies with substantial EU activity, specifically those with €150 million or more in EU revenue and at least one EU subsidiary or branch.

In contrast, the CSDDD has a narrower scope, focusing on about 13,000 EU companies and 4,000 non-EU companies. It applies to: 

• EU companies with 500 or more employees and €150 million or more in net worldwide turnover Companies in high-impact sectors with 250 or more employees and €40 million or more in net worldwide turnover
• Non-EU companies if their EU-generated turnover aligns with these thresholds

The scope of these directives relates back to their overall goals. The CSRD aims to create a comprehensive sustainability reporting framework across a wide range of companies, ensuring that investors, consumers, and other stakeholders have access to comparable and reliable sustainability information. 

The CSDDD, on the other hand, targets larger companies and those in high-impact sectors, focusing on implementing robust due diligence processes to address human rights and environmental risks in their operations and value chains.

Implementation Timelines for CSRD

The CSRD follows a phased implementation approach, recognizing the varying levels of preparedness among different types of companies. Large public-interest entities with 500 or more employees, already subject to the Non-Financial Reporting Directive (NFRD), were the first to comply, starting from January 1, 2024. 

This year, on January 1, 2025, large companies not previously covered by NFRD need to comply. Listed SMEs, small and non-complex credit institutions, and captive insurance companies have until January 1, 2026, to comply, acknowledging the potential challenges these smaller entities might face in implementing comprehensive sustainability reporting.

Finally, non-EU companies who have substantial EU activity must comply by January 1, 2028. This extended timeline recognizes the complexities these global companies might face in aligning their reporting practices with EU standards.

CSDDD Implementation Timeline

The CSDDD timeline was finalized in July of 2024, but the current proposal suggests a gradual implementation starting from 2027. 

• Summer 2027: Companies with over 5,000 employees and a net turnover of €1.5 billion must comply. Non-EU companies with an EU net turnover of over €1.5 billion also need to comply.
• Summer 2028: Companies with over 3,000 employees and a net turnover of €900 million must comply. Non-EU companies with an EU net turnover of more than €900 million also need to comply.
• Summer 2029: Companies with over 1,000 employees and a net turnover of €450 million must comply. Non-EU companies with an EU net turnover of more than €450 million also need to comply.

This staggered approach gives companies time to prioritize implementing due diligence processes.

Core Focus and Guidelines

The CSRD mostly focuses on standardized sustainability reporting. It requires companies to disclose information on a wide range of sustainability topics, including environmental issues like climate change, resource use, and pollution. Social and employee topics  are also in-scope, covering things like gender equality and working conditions. Human rights, anti-corruption and bribery, and governance factors round out the comprehensive reporting requirements.

To ensure comparability and reliability of reported information, companies must adhere to the European Sustainability Reporting Standards (ESRS). These standards have been developed to align with international frameworks like:

• The Task Force on Climate-related Financial Disclosures (TCFD) 
• The Global Reporting Initiative (GRI)

These both work to ensure a degree of global consistency while meeting the EU's specific needs.

The CSDDD, in contrast, focuses on implementing due diligence processes to identify, prevent, mitigate, and account for adverse human rights and environmental impacts in companies' operations and value chains. This directive goes beyond reporting to require active management of sustainability risks and impacts.

Key requirements of the CSDDD include: 

• Integrating due diligence into corporate policies
• Identifying actual or potential adverse impacts
• Preventing or mitigating these potential impacts

Companies must also assess the effectiveness of their measures, communicate externally on their due diligence efforts, and provide remediation when appropriate.

This focus on due diligence represents a shift from just disclosure to active risk management and impact mitigation. It requires companies to take a proactive stance in addressing sustainability issues throughout their value chains, potentially driving significant changes in business practices and supplier relationships.

Areas of Intersection

While the CSRD and CSDDD have specific primary focuses, they share several areas of overlap, which reflects an effort to achieve a comprehensive EU approach to corporate sustainability.

Double Materiality

Both directives embrace the concept of double materiality, a principle that considers not only the impact of sustainability issues on the company (financial) but also the company's impact on society and the environment (impact). This dual perspective ensures a more comprehensive understanding and management of sustainability issues.

Value Chain

Value chain considerations are another area where these intersect. Both directives require companies to look beyond their direct operations and consider impacts and risks throughout their supply chains. This expanded scope recognizes the connected nature of global business and the potential for significant sustainability impacts to occur in supply chains or through business relationships.

Climate Plans

Climate transition plans are required by both directives, mandating companies to develop and disclose plans aligned with the Paris Agreement's 1.5°C goal. This alignment emphasizes the EU's commitment to climate action and the expectation that businesses will play a crucial role in the transition to a low-carbon economy.

Stakeholders

Stakeholder engagement is emphasized in both directives, although it is more explicit in the CSDDD. This recognizes the importance of understanding and addressing the concerns of those affected by a company's operations, from employees and local communities to customers and investors.

Taking a Risk-Based Approach

Finally, both directives advocate for a risk-based approach to sustainability issues. This approach encourages companies to prioritize the most severe and likely impacts, ensuring that resources are allocated effectively to address the most pressing sustainability challenges.

These areas of intersection create opportunities for companies to develop integrated approaches to compliance, potentially streamlining efforts and ensuring consistency across sustainability initiatives.

The Omnibus Question

It is important to note that the EU Commission is considering amending several sustainability reporting frameworks, including the CSDDD and CSRD. 

This potential initiative, announced by EU Commission President in November 2024 would aim to streamline reporting requirements and reduce bureaucratic burden for companies, potentially cutting reporting obligations by at least 25% by 2025.

While the fate of the Omnibus is in question, for compliance teams, these changes could significantly simplify the reporting process, reducing redundant and overlapping data points.  As this development continues to progress, compliance teams should still prepare for how it could affect existing reporting systems and processes.

Best Practices for Ensuring CSDDD and CSRD Alignment

To prepare for aligned compliance with both the CSRD and CSDDD, compliance teams should adopt a holistic and proactive approach within their programs. Establishing cross functional teams with representatives from finance, legal, operations, human resources, and sustainability, will help to ensure a comprehensive understanding of the company's operations and potential impacts. 

This cross-functional collaboration will be essential for breaking down silos and generating thorough, informative reports that align with both CSRD and CSDDD requirements.

Additionally, compliance teams should focus on developing and implementing a risk-based due diligence approach that covers both human rights and environmental impacts throughout the value chain. This approach should include establishing clear governance structures, with formalized responsibilities for senior management and board oversight.

Compliance teams should also work on integrating sustainability and due diligence into the organization's governance structures, relevant policies, and risk management systems. This integration should be supported by key performance metrics related to environmental and human rights due diligence, which can be incorporated into supplier performance scorecards and used to inform commercial and operational decision-making.

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