Jul 25, 2024 4 min read Policy & Standards

Countdown to CSDDD: 3 years to compliance

Firms are facing an uphill battle to ensure compliance, particularly on human rights due diligence.

Melodie Michel

Photo by Steven Lelham on Unsplash

With exactly three years left for the first wave of companies to comply with the Corporate Sustainability Due Diligence Directive (CSDDD), the pressure is on for the world’s largest corporations to transform their supply chain accountability.

Finally approved by the EU Parliament in April after months of tense negotiations between EU member states, the EU Corporate Sustainability Due Diligence Directive, known as CSDDD or CS3D, was published in the EU Official Journal on July 5, 2024 – setting the first deadline for compliance on July 25, 2027.

This means that companies with 5,000 or more employees and €1.5 billion in net turnover have exactly three years left to identify and address actual and potential human rights and environmental risks within their operations, subsidiaries and supply chains. If they fail to do so, they will be legally liable for any violations – with fines up to 5% of the company’s turnover.

“Three years is one of the longest lead in times allowed for implementing an EU law, and this is done on purpose because of the scale of the change needed in systemic corporate behaviour," Richard Gardiner, Head of EU Public Policy at the World Benchmarking Alliance, tells CSO Futures.

Reminding companies and their Chief Sustainability Officers that "CSDDD does not prohibit having risks in your supply chain" but punishes inaction in addressing them, he recommends an open and honest approach.

"Hiding or ignoring risks will only result in more litigation and bad press, whereas using CSDDD preparation to openly discuss the problems will allow time for the law and subsequent guidance to help address the problems in a targeted fashion,” he adds, advising firms to share knowledge with their peers to spur sector-wide transformation.

According to the law’s staged implementation, the next waves of compliance will take place in July 2028 for companies with 3,000+ employees and €900 million turnover, and in July 2029 for those with 1,000+ employees and €450 million turnover.

Large corporations score poorly on human rights due diligence

Firms are facing an uphill battle to ensure compliance, particularly on human rights due diligence. With complex and fragmented supply chains, 80% of the 2,000 most influential companies (half of which will fall under the scope of CSDDD) have not even taken the initial steps, such as identifying, assessing and taking action on human rights risks and impact, according to the World Benchmarking Alliance’s 2024 Social Benchmark.

Just 32 of the 2,000 firms assessed (1.6%) stand out for their human rights protection policies and practices: they include EDP, Unilever, EDF, L’Oreal and Danone, as well as energy firms Anglo American, Eni and Glencore – a surprising result considering the 71 allegations of human rights abuses in the Swiss commodity trader’s critical minerals supply chain between 2010 and 2023.

Only 4% of these large companies pay or have a target to pay workers a living wage (in fact, worker poverty is growing worldwide), 3% comply with the International Labour Organisation (ILO) standard on working hours, and 2% disclose their global gender pay gap, the Social Benchmark points out.

“The Social Benchmark reveals that companies are leaving too many people behind, with 90% of the 2,000 companies assessed not even being halfway to meeting fundamental societal expectations on human rights, decent work and ethical conduct,” write the authors.

Environmental risk assessment must go beyond GHG emissions

While many of the large companies having to comply with CSDDD in 2027 have been reporting on environmental sustainability for years, the scope of their risk assessment may be too limited for the directive’s expectation.

Indeed, CSDDD not only requires companies to address their impacts relating to climate change (such as greenhouse gas emissions), but also environmental risks more broadly – including biodiversity loss, pollution or nature destruction.

Few companies are currently identifying nature-related risks, though the publication of the Taskforce on Nature-related Financial Disclosures (TNFD) framework last year has paved the way for more consistent work in this area. Hundreds of companies have now become TNFD early adopters and should publish their first disclosures in the next two years.

But data from the World Benchmarking Alliance shows that large gaps remain – particularly in the highly nature-dependent food and agriculture sector. Almost half of the top 350 companies in this industry are yet to disclose their supply chain emissions, and just 2% disclose their impact on soil health and biodiversity.

Assessing environmental risks in a holistic way will also require firms to overcome their own contradictions. For example, many agribusiness firms have pledged to nudge their supply chains towards regenerative agriculture practices, which brings a host of climate and nature protection benefits – but the Alliance’s report shows that less than 10% disclose data on optimising the use of fertilisers, and only around 4% disclose data on minimising the use of pesticides.

Robustness of transition plans must improve

Finally, CSDDD requires companies to publish, adopt and put into effect a climate transition plan aligned with the Paris Agreement.

CDP data shows that a quarter of reporting companies now claim to have a 1.5ºC-aligned transition plan – but less than 1% provide information on all 21 indicators of robustness and credibility.

Guidance on what makes a “good” transition plan was still scarce until recently, with the publication of the UK’s Transition Plan Taskforce (TPT) disclosure framework – now considered a “gold standard” of transition planning.

Companies looking to improve their transition plans for CSDDD compliance can refer to CSO Futures’ article series on climate transition planning: