What Does the CSDDD Mean for Climate Transformation?

08/23/2023 | Reading time: 5 minutes

The Climate Implications of the EU’s Corporate Sustainability Due Diligence Directive (CSDDD)

The world is facing an unprecedented climate crisis, and businesses are increasingly being called upon to play a crucial role in addressing it. The new European Union Corporate Sustainability Due Diligence Directive (CSDDD) is a significant step in this direction, placing a spotlight on the climate-related implications of global supply chains. In this article, we’ll delve into the CSDDD’s impact on climate action, explore its key provisions, and highlight how companies can leverage it as an opportunity to drive positive change.

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What is the EU CSDDD?

At its core, the CSDDD requires companies to take a meticulous approach to understanding and mitigating the social and environmental impacts along their entire value chain, encompassing both direct and indirect suppliers, their own operations, as well as products and services. The directive aims for global compliance with human rights standards and environmental protections, fostering a fairer and more sustainable global economy and responsible corporate governance.

According to EU Justice Commissioner Didier Reynders, “Only companies that protect human rights and do not harm the environment should operate within the EU.” This underscores the directive’s commitment to driving positive change on a global scale.

After being adopted by the European Council in December 2022, the CSDDD gained further momentum as the European Parliament voted in favor of enhancing the original proposal on June 1, 2023.

EU countries have two years to incorporate CSDDD into national law.

csddd explain - european supply chain law versus lksg

Who Does the CSDDD apply to?

There are two Groups of EU companies impacted by the CSDDD

  1. Group 1: For EU-based companies, the directive applies to those with more than 500 employees and a turnover exceeding €150M.
  2. Group 2: EU-based companies with over 250 employees and a €40M turnover also fall under the directive, provided that 50% of their revenue comes from high-risk industries like fashion, minerals, or agriculture. The rules will start to apply to this group 2 years after Group 1.

Non-EU companies operating within the EU also fall under the scope of the CSDDD.

This includes third-country companies active in the EU that meet the turnover thresholds aligned with the above-mentioned groups, with the revenue being completely generated in the EU (at least 150M), irrespective of whether they have a branch or subsidiary in the region.

While small and medium-sized enterprises (SMEs) are not directly affected, their role as suppliers to larger affected companies indirectly involves them in compliance efforts.

What Climate Considerations Do Companies Need to Address Under the CSDDD?

Undoubtedly, one of the most impactful aspects of the CSDDD is its implications for climate protection. The directive obliges companies to formulate and execute a transition plan aligning their business model and strategy with the following objectives:

  1. Aligning supply chain with 1.5°C target in line with the Paris Agreement.
  2. Achieving climate neutrality, as defined by the European Climate Law, including the 2050 climate neutrality target and the climate target to decrease 55% of emissions by 2030 in comparison to 1990 for operations within the EU.
  3. Integrating all suppliers (direct and indirect) into specific climate risk and impact measures, to identify fitting actions to reduce, mitigate and prevent emissions.
  4. The climate due diligence obligations must be integrated into the management systems. Companies must track complaints and provide transparent, public information about their due diligence practices, including an annual report.
  5. Companies are obliged to control and monitor the effectiveness of these measures.
European CSDDD integration versus German LKSG

What does this involve in concrete terms? All suppliers, whether direct or indirect, are obligated to identify actual or potential climate impacts and risks, taking suitable measures to prevent, mitigate, and rectify them. These due diligence responsibilities must be seamlessly integrated into the companies’ management systems, ensuring that climate considerations become an integral part of their operations. Furthermore, businesses are required to rigorously monitor and assess the effectiveness of these measures, creating a cycle of continuous improvement and accountability. This approach ensures that the environmental considerations embedded within the CSDDD translate into tangible actions that drive climate resilience throughout the supply chain.

Comparing the CSDDD to the German Supply Chain Law

While Germany’s Lieferkettensorgfaltspflichtengesetz (Supply Chain Due Diligence Act) took effect on January 1, 2023, the EU’s directive expands upon it significantly:

    1. The scope of regulation covers far more European companies (250 employees) compared to the German law (over 3,000 employees, and from 2024, over 1,000 employees).
    2. The EU directive mandates a broader consideration of the entire supply chain, users, and disposers of products, not just direct suppliers.
    3. The EU regulation may introduce civil liability for companies, allowing affected parties to seek damages in European courts.
CSDDD versus LKSG - an overview

What Does the Directive Mean for SMEs?

While SMEs are indirectly impacted by the EU Supply Chain Due Diligence Directive, there’s a silver lining. Large corporations will likely extend their diligence requirements to their suppliers, presenting SMEs with an opportunity to secure a competitive advantage by proactively aligning with the directive’s principles.

Embracing this opportunity, however, demands resources and comprehensive knowledge. SMEs can benefit from holistic solutions that digitally streamline these processes and aid in compliance. To alleviate the burden on SMEs, the directive includes provisions for state subsidies to support compliance efforts when necessary.

Harnessing the CSDDD for Climate Action

The EU Supply Chain Due Diligence Directive presents a unique chance for businesses to drive meaningful climate action across their supply chains. By aligning with the directive’s requirements, companies can contribute to a more sustainable future while enhancing their reputations and market positions.

Climate Ready Supply Chain

With the help of our Climate Intelligence Platform, you can better prepare for the new law. Use the software tool to enhance transparency and collaboration with your suppliers, fostering a stronger commitment to climate-conscious practices. The Climate Intelligence Platform collects climate-relevant data from suppliers, provides specific Climate Scorecards and insides into climate risks, potentials and best practices to reduce emissions.

Get in touch with us to learn more about the Climate Intelligence Platform.