Many large companies are already working on conducting their double materiality assessments (DMAs) and preparing their reports in compliance with the EU Corporate Sustainability Reporting Directive (CSRD). In parallel, the European Parliament has recently adopted the EU Corporate Sustainability Due Diligence Directive (CSDDD). These two directives are not mutually exclusive and are intended to be applied in tandem by companies that fall under the scope of both.
Amongst other requirements, companies under the CSRD are required to report on their material sustainability impacts, while companies under the CSDDD are required to conduct human rights and environmental due diligence (HREDD) to identify their sustainability impacts and, where adverse actual or potential impacts are identified, to take appropriate measures to prevent, mitigate and remediate them. It is expected that CSDDD compliance obligations will start in 2027 at the earliest once the directive has been transposed into national legislation.
In this article, we take a closer look at the key similarities and differences between CSRD and CSDDD in terms of HREDD requirements. We will also explain what these mean for companies’ internal processes.
Key Similarities Between CSRD and CSDDD
1. Annual Reporting is Required for Compliance
The CSRD focuses on reporting, and the CSDDD also requires companies to annually report on their implementation of human rights and environmental due diligence. However, the CSDDD explicitly states that companies in scope of the CSRD do not need to produce additional reports; they can meet their CSDDD reporting obligations in the same report as required for CSRD compliance.
This is good news for resource-constrained sustainability departments already stretched thin by CSRD disclosures. Depending on the level of granularity and material issues covered in CSRD reports, CSDDD reporting may prove complementary and compatible with those efforts.
2. Adopt a Risk-based Approach to Due Diligence
Both the CSRD and CSDDD reference the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises (MNE Guidelines), defining “due diligence” as encompassing policies and management systems, assessing, addressing, monitoring, and reporting on sustainability impacts, as well as remediating them.
The directives align in prioritising impacts based on severity and likelihood. There is no expectation of investing equal resources in addressing all possible sustainability impacts. According to the CSDDD, companies in scope need to identify general areas of heightened risk first and focus their due diligence efforts there. Similarly, the CSRD focuses on reporting impacts that are considered the most material.
3. Defining Risks vs Impacts
The new EU directives have brought much-needed clarity to the terminology of impacts and risks. “Impacts” refer to adverse effects, whether actual or potential, on human rights and the environment (“inside-out” perspective). In contrast, “risks” pertain to negative financial effects on the company from social and environmental issues (“outside-in” perspective). This distinction is welcomed, as some guidelines may use those two terms without this explicit clarity. For example, the UNGPs use the term “human rights risks” to denote adverse impacts on human rights, contributing to frequent misunderstandings in the industry regarding risk assessments.
What this means for businesses is that using inherent risk datasets on their own is no longer sufficient to assess impacts. While these datasets are still useful for identifying general areas where adverse impacts are most likely to occur, companies need to adopt the UNGP-aligned methodology to evaluate the severity of their impacts. This involves assessing the scope, scale and irremediability of their actual and potential impacts. For many companies, this will be a new requirement, and they may lack the technical knowledge to conduct such assessments.
4. Consider Social and Environmental Issues in Tandem
The CSRD and CSDDD cover a wide range of social and environmental issues impacted by companies’ operations and value chains, including labour rights, civil and political rights, economic, social and cultural rights, climate change, pollution, nature and biodiversity, and waste. Although there are some differences in the list of social and environmental issues specifically highlighted by the two directives, they are broadly aligned.
Furthermore, the two directives explicitly link social and environmental issues, providing examples of how a company’s environmental impacts can have social consequences. The CSRD specifies that community impacts can stem from environmental matters, such as the negative impact on communities’ access to clean drinking water when withdrawing water in water-stressed areas. Similarly, the CSDDD highlights that environmental impacts can significantly affect social issues. For example, harmful soil changes, water or air pollution, harmful emissions, excessive water consumption, land degradation and deforestation can impact access to food and safe drinking water, human health and well-being.
Therefore, the main challenge for companies will be aligning their due diligence processes for social and environmental issues. More mature companies may already have separate human rights and environmental due diligence processes. Combining these into a coherent process of identifying, addressing, monitoring and remediating both social and environmental issues will be challenging and require finding common language between traditionally separate departments.