Introducing the Corporate Sustainability Due Diligence Directive (CSDDD) and Its Impact on Corporate Decarbonization
In our previous article, we delved into the implications of the Corporate Sustainability Reporting Directive (CSRD) and the Carbon Border Adjustment Mechanism (CBAM) on Asian suppliers. Adopted by the European Parliament on April 24, 2024, the directive establishes a comprehensive framework aimed at enhancing the management of human rights and environmental impacts for companies. It mandates that companies operating within the EU implement robust governance and due diligence processes, compelling Asian suppliers to align their environmental performance to remain strategic partners in the value chain.
Why is CSDDD Important from a Climate Perspective?
A key objective of the CSDDD is to ensure that the business models and strategies of in-scope companies are aligned with the Paris Agreement, which seeks to limit global warming to 1.5 °C above pre-industrial levels, as well as the EU’s long-term emission reduction strategies. Unlike previous directives such as the CSRD, which primarily focused on transparency regarding emission footprints, the CSDDD goes further by requiring both large and smaller companies to develop and implement science-based emission reduction strategies.
Non-compliance with the CSDDD can lead to serious consequences, including civil liability for damages and financial penalties imposed by EU member states, in addition to public censure. This directive despite covering less companies than initially planned represents a significant step forward in the EU’s efforts to drive corporate accountability and foster sustainable business practices, underscoring the importance of integrating climate considerations into corporate governance and operations.
Who will be affected? When? What are the complexities?
1. 3 Phases over 3 Years – (Phased Implementation Timeline)
The Corporate Sustainability Due Diligence Directive (CSDDD) will be implemented in three phases over three years, starting in 2027. This phased approach gradually extends compliance requirements from larger, more established corporations to smaller companies. The table below provides an overview of the respective thresholds for EU and non-EU companies (including those in financial services):
Phase | EU companies | Non-EU companies |
Phase 1 (in 2027) |
|
|
Phase 2 (in 2028) |
|
|
Phase 3 (in 2029) |
| |
Compliance Requirements
The regulation mandates that in-scope companies first identify and assess adverse human rights and environmental impacts. Following this assessment, companies must establish appropriate measures to prevent, mitigate, and remediate these adverse impacts. Finally, companies are required to adopt and implement a credible and detailed climate transition plan.
The climate transition plan must contain:
Time-bound targets in five years steps from 2030 to 2050
Planned key actions toward decarbonization
Details on investment and funding for its implementation
Description of governance roles within the plan
Scope Obligations
These obligations apply not only to the companies’ own operations (scope 1 and 2) but also extend to activities carried out by subsidiaries and throughout their value chains (scope 3). Additionally, companies are required to support business partners classified as Small and Medium-sized Enterprises (SMEs) that are not part of a large group.
It’s important to note that the reporting requirements under the CSDDD are designed to align with the Corporate Sustainability Reporting Directive (CSRD). This alignment ensures that there is no double reporting, allowing companies to submit their climate mitigation strategies under the CSRD.
Proactive Decarbonization: A Call to Action
With the Corporate Sustainability Due Diligence Directive (CSDDD) and other impending EU regulations, companies face an urgent need to gain comprehensive transparency regarding their carbon footprint, encompassing both their operations and supply chains. It is imperative for affected organizations to develop climate neutrality plans that align with the 1.5°C target established by the Paris Agreement.
Companies, particularly those that have not yet proactively embarked on their decarbonization journey—including smaller entities entering phases 2 and 3—must begin preparing climate neutrality plans immediately. Additionally, organizations with existing decarbonization strategies should reassess and update their plans to ensure compliance with the latest CSDDD requirements.
3 Min Test to Asssess your Business’s CSDDD Readiness
To guide companies in evaluating their preparedness, the following questions can serve as a structured approach to determining next steps. Proceed to the subsequent question if the answer to the previous one is affirmative:
Environmental Policy and Strategy
Does your organization have an environmental policy, business strategy, or action plan addressing environmental risks in both the short and long term?
Alignment with EU Climate Targets
Is this policy or plan aligned with the EU climate transition plan, specifically the goal of limiting global warming to 1.5°C?
Time-Bound Action Plan
Does the plan include a time-bound action strategy outlining how the organization will achieve its targets, and does it engage both external and internal stakeholders along the value chain?
Key Performance Indicators
Are there verifiable and quantifiable key performance indicators (KPIs) within the action plan?
Integration into Business Strategy
Is the action plan integrated into the organization’s overarching business strategy?
The Role of the Science-Based Targets Initiative (SBTi)
As alignment with the 1.5°C target becomes critical for legislative compliance as well, the Science-Based Targets initiative (SBTi) emerges as a pivotal voluntary instrument. This initiative enables corporates to commit to and drive decarbonization efforts in alignment with the Paris Agreement, thus positioning themselves as leaders in sustainable business practices.
By addressing these elements, companies can not only comply with upcoming regulations but also contribute to global efforts to combat climate change, reinforcing their commitment to sustainability and corporate responsibility.
Key Takeaways
While committing to a target is an essential first step, it is crucial for corporations to urgently assess their decarbonization potentials and develop credible strategies to ensure future compliance. Given that energy consumption accounts for the majority of carbon emissions, companies must prioritize their renewable energy transition immediately. This involves creating a credible, tailored renewable energy roadmap that encompasses not only their own operations but also their supply chain. Proactive and strategic action in this area will position companies for long-term success and regulatory compliance.
Get in touch with ivancamilo.trianamartin@actrenewable.net if you want to learn more about the impact of the CSDDD on your specific business.
Reach out to felix.fink@actrenewable.net and leverage your renewable energy potential (from on-site solar to PPAs and Power-to-X) – ensuring compliance and leading by example.
get in touch
Need assistance in other RE topics? Reach out to the team for support: contact@actrenewable.net