What is the difference between the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive?

Directives regulating corporate sustainability and reporting are making progress, but what kinds of companies do they apply to – and how? At the beginning of September, the views of legal experts on the current status and impacts of the directives were heard in a webinar organised by FIBS, the largest corporate responsibility network in the Nordic countries, and law firm Dittmar & Indrenius. In the future, companies will have not only a reporting obligation, they will also be required to interact more with their stakeholders.

The Corporate Sustainability Reporting Directive (CSRD), which has already entered into force, and the Corporate Sustainability Due Diligence Directive (CSDDD), which is currently being phased in, both support each other.

Importance of procurement activities and processes will be emphasised

Hanna-Mari Manninen, Head of Strategic Advisory at Dittmar & Indrenius, detailed the differences between the two directives. The Corporate Sustainability Reporting Directive (CSRD), as its name suggests, focuses on reporting obligations related to sustainability activities, and the focus is on the provision of information. The Corporate Sustainability Due Diligence Directive (CSDDD), on the other hand, addresses activities and processes – how to ensure that the harmful impacts of business activities are minimised in the activities of the company in question and within its chain of activities. 

Chain of activities is a concept that is specifically discussed in the CSDDD. The concept is slightly narrower than that of the value chain used in the CSRD, as it covers the manufacturing of a product from raw materials to transportation and storage, while the last link in the value chain is distribution, for example sales to consumers in brick-and-mortar stores.

The penalties for non-compliance with the directives also differ. Companies who neglect their reporting obligations under the CSRD are subject to light penalties, while the due diligence directive (CSDDD) introduces new types of penalties. If a company has not complied with its obligations and, as a result of this negligence, damage has occurred in the chain of activities, the company is liable for compensation. Accordingly, the most important aspect of the CSDDD is the process in which harmful human rights or environmental impacts of business activities are prevented and stopped.

The penalties resulting from the neglect of obligations are defined by EU Member States at the national level. Manninen also discussed the reputational risk for companies, as the penalties are public information.

No longer enough to enquire just about the technical specs and price of a product

The concept of the chain of activities emphasises even closer dialogue between a company and its stakeholders, including employees, investors and the entire chain of activities. Developing the sustainability of the chain of activities requires interaction. It is no longer enough to enquire just about the technical specifications and price of a product when ordering, reminded Michael Ristaniemi, Legal and Policy Officer at the European Commission, in the webinar.

Increasing cooperation is one of the most important ways in which the Corporate Sustainability Due Diligence Directive will impact the operations of companies. Ristaniemi also mentioned the utilisation of technology. As companies start to report on their sustainability more widely, they will need data from their chains of activities. There is a clear need for new technological solutions in this area.

In addition, the procurement processes of companies will change. Chains of activities will be subject to monitoring by authorities, making them legal issues. The role of lawyers in companies may therefore grow, Ristaniemi pointed out. At the same time, it must be ensured that the obligations set for SMEs within chains of activities are not unreasonable.

Both experts emphasised that the Corporate Sustainability Due Diligence Directive focuses on processes. Has the company done its best to minimise the harm caused by its activities on a global level?

For example, fulfilling the obligation of due diligence is emphasised in the assessment of complicity if, for example, an accident occurs. All processes must be in order, and the risk assessment must include an assessment of severity. According to Ristaniemi, the entire directive has a strong emphasis on stakeholders, who must be included in all stages. Meaningful cooperation is an area in which companies should go above the minimum.

How should SMEs prepare for the CSDDD?

SMEs can find answers to questions about the Corporate Sustainability Due Diligence Directive in, for example, the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct. The European Commission is working on a voluntary standard for unlisted SMEs, which will facilitate compliance with the directive in the future.

Manninen encouraged SMEs within chains of activities to develop their sustainability to a degree that at least the basics are in order and that this can be demonstrated. It is worth preparing for the fact that large companies will need valid data from their partners when they report on their sustainability and choose partners. Listed below are some of Manninen’s specific tips for SMEs.

Begin preparing for the CSDD as follows:

• Identify and assess your company’s harmful human rights and environmental impacts and take steps to reduce them
• Develop your cooperation with stakeholders
• Update your risk management processes
• Prepare a plan for your company’s climate actions

Published: 18.9.2024

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