Category Archives: CSDDD

Double Materiality Assessment and Human Rights impacts – connecting CSRD and CSDDD

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⭕ The requirements for corporate assessment of sustainability impacts, risks and opportunities (IROs) are now defined by the ESRS as part of the EU Directive CSRD.

When performing its Double Materiality Assessment, the undertaking shall consider the list of sustainability topics in ESRS 1 AR 16, in addition to any entity-specific sustainability topics not covered by this list.

The outcome of the undertaking’s sustainability due diligence process informs the undertaking’s assessment of its material IROs. Due diligence is the process by which undertakings identify, prevent, mitigate and account for how they address the actual and potential negative impacts on the environment and people connected with their business. (ESRS 1, par. 58-59)

In the case of a potential negative human rights impact, the severity of the impact takes precedence over its likelihood. (ESRS 1, par. 45)

The IROs have to be faithfully represented, which means that the information needs to be (i) complete, (ii) neutral and (iii) accurate. (ESRS 1, QC 5)

A complete depiction of an IRO includes all material information necessary for the reader of the report to understand that IRO. This includes how the undertaking has adapted its strategy, risk management and governance in response to that IRO, as well as the metrics identified to set targets and measure performance. (ESRS 1, QC 6)

Opportunities shall not be overstated and risks shall not be understated. Information shall not be netted or compensated to be neutral. (ESRS 1, QC 8)

Accuracy requires that assertions are reasonable and based on information of sufficient quality and quantity, descriptions are precise, and estimates, approximations and forecasts are clearly identified as such. (ESRS 1, QC 9)

⭕ Corporate sustainability due diligence obligations are now defined by the EU Directive CSDDD, which also includes a list of human rights and prohibitions.

Here is where it becomes clear that the CSRD and the CSDDD are complementary.

The CSRD is an obligation to publish, while the CSDDD is an obligation to act (on matters already defined in international human rights instruments).

⭕ The CSDDD list of human rights and prohibitions greatly overlaps the list of sustainability topics to be assessed as part of the ESRS.

And it also becomes clear that in many (if not most) cases, the assessment of material negative impacts needs to be based on the severity of the impact rather than its likelihood, as a majority of topics to be assessed are listed as human rights.

Below you will find the CSDDD list of human rights and prohibitions as well as CSRD topics to be assessed during your DMA – they speak for themselves.

ANNEX, Part I, DIRECTIVE (EU) 2024/1760 of 13 June 2024 on corporate sustainability due diligence (CSDDD)

 

RIGHTS AND PROHIBITIONS INCLUDED IN INTERNATIONAL HUMAN RIGHTS INSTRUMENTS

  • The right to life
  • The prohibition of torture, cruel, inhuman or degrading treatment
  • The right to liberty and security
  • The prohibition of arbitrary or unlawful interference with a person’s privacy, family, home or correspondence and unlawful attacks on their honour or reputation
  • The prohibition of interference with the freedom of thought, conscience and religion
  • The right to enjoy just and favourable conditions of work, including a fair wage and an adequate living wage for employed workers and an adequate living income for self-employed workers and smallholders, which they earn in return from their work and production, a decent living, safe and healthy working conditions and reasonable limitation of working hours
  • The prohibition to restrict workers’ access to adequate housing, if the workforce is housed in accommodation provided by the company, and to restrict workers’ access to adequate food, clothing, and water and sanitation in the workplace
  • The right of the child to the highest attainable standard of health; to education; to an adequate standard of living; to be protected from economic exploitation and from performing any work that is likely to be hazardous or to interfere with the child’s education, or to be harmful to the child’s health or physical, mental, spiritual, moral or social development; to be protected from all forms of sexual exploitation and sexual abuse and to be protected from being abducted, sold or moved illegally to a different place in or outside their country for the purpose of exploitation
  • The prohibition of the employment of a child under the age at which compulsory schooling is completed and, in any case, is not less than 15 years, except where the law of the place of employment so provides
  • The prohibition of the worst forms of child labour (persons below the age of 18 years) (slavery, sale, trafficking, debt bondage, serfdom, forced or compulsory labour, including the forced or compulsory recruitment of children for use in armed conflict, prostitution, pornography, use, procuring or offering of a child for illicit activities, in particular for the production or trafficking of drugs, work which, by its nature or the circumstances in which it is carried out, is likely to harm the health, safety or morals of children
  • The prohibition of forced or compulsory labour
  • The prohibition of all forms of slavery and slave-trade, including practices akin to slavery, serfdom or other forms of domination or oppression in the workplace, such as extreme economic or sexual exploitation and humiliation, or human trafficking
  • The right to freedom of association, of assembly, and the rights to organise and collective bargaining (including freedom to form or join trade unions without unjustified discrimination or retaliation and the right to strike)
  • The prohibition of unequal treatment in employment, unless this is justified by the requirements of the employment (including the payment of unequal remuneration for work of equal value, discrimination on grounds of national extraction or social origin, race, colour, sex, religion, political opinion)
  • The prohibition of causing any measurable environmental degradation, such as harmful soil change, water or air pollution, harmful emissions, excessive water consumption, degradation of land, or other impact on natural resources, such as deforestation, that: substantially impairs the natural bases for the preservation and production of food; denies a person access to safe and clean drinking water; makes it difficult for a person to access sanitary facilities or destroys them; harms a person’s health, safety, normal use of land or lawfully acquired possessions; substantially adversely affects ecosystem services through which an ecosystem contributes directly or indirectly to human wellbeing
  • The right of individuals, groupings and communities to lands and resources and the right not to be deprived of means of subsistence, which entails the prohibition to unlawfully evict or take land, forests and waters when acquiring, developing or otherwise using land, forests and waters, including by deforestation, the use of which secures the livelihood of a person

ESRS 1 AR 16, ANNEX I, European Sustainability Reporting Standards (ESRS), DIRECTIVE (EU) 2022/2464 of 14 December 2022 as regards corporate sustainability reporting (CSRD)

 

TOPICS TO BE CONSIDERED IN DOUBLE MATERIALITY ASSESSMENT (DMA)

SOCIAL TOPICS

  • Working conditions, including:
    • Secure employment
    • Working time
    • Adequate wages
    • Social dialogue
    • Freedom of association, the existence of works councils and the information, consultation and participation rights of workers
    • Collective bargaining, including rate of workers covered by collective agreements
    • Work-life balance
    • Health and safety
  • Equal treatment and opportunities for all, including:
    • Gender equality and equal pay for work of equal value
    • Training and skills development
    • Employment and inclusion of persons with disabilities
    • Measures against violence and harassment in the workplace
    • Diversity
  • Child labour
  • Forced labour
  • Adequate housing for workers
  • Water and sanitation for workers
  • Privacy for workers
  • Communities’ economic, social and cultural rights
  • Adequate housing, Adequate food, Water and sanitation, Land-related impacts, Security-related impacts
  • Communities’ civil and political rights
  • Communities’ freedom of expression
  • Rights of indigenous peoples
  • Privacy for consumers and/or end-users
  • Freedom of expression for consumers and/or end-users
  • Access to (quality) information for consumers and/or end-users
  • Personal health and safety of consumers and/or end-users
  • Protection of children
  • Social inclusion of consumers and/or end-users (non-discrimination, access to products and services, responsible marketing practices)

ENVIRONMENTAL TOPICS

  • Climate change adaptation and mitigation
  • Energy efficiency and renewable energy deployment
  • Pollution of air, water, soil, living organisms and food resources
  • Substances of concern and of very high concern
  • Microplastics
  • Water consumption, withdrawals, discharges
  • Water discharges in the oceans
  • Extraction and use of marine resources
  • Direct impact drivers of biodiversity loss
  • Impacts on the state of species
  • Impacts on the extent and condition of ecosystems
  • Impacts and dependencies on ecosystem services
  • Resources inflows, including resource use (circular economy)
  • Resource outflows related to products and services (circular economy)
  • Waste

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Stay tuned for more CSRD, ESRS and CSDDD insights.

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The EU CSDDD explained

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The Green Deal, EU’s growth strategy, sets out that all EU actions and policies should pull together to help the EU achieve a successful and just transition towards a sustainable future.

It also sets out that sustainability should be further embedded into the corporate governance framework.

The Corporate Sustainability Due Diligence Directive (CSDDD) is a key component of this strategy, along with the Corporate Sustainability Reporting Directive (CSRD).

CSRD is an “obligation to publish”, while CSDDD is an “obligation to act”. As such, they are complementary. Companies complying with CSRD will not need to report separately on due diligence, nor on its transition plan for climate change mitigation.

CSDDD in-scope companies, in short

  • EU companies with more than 1000 employees (calculated on a full-time equivalent basis) and a net worldwide turnover of more than 450 M€ in the last financial year
  • EU companies under franchising or licensing agreements in the EU, with royalties of more than EUR 22,5 million, provided that the ultimate parent company had a worldwide net turnover of at least 80 M€ in the last financial year
  • Non-EU companies, including ultimate parent company of a group that on a consolidated basis generated a net turnover of more than 450 M€ in the EU in the last financial year
  • Ultimate parent companies are jointly liable with their subsidiary for a failure of the latter to comply with its CSDDD obligations

Entry into force

  • 2027: > 5 000 employees and > 1 500 M€ net worldwide turnover
  • 2028: > 3 000 employees and > 900 M€ net worldwide turnover
  • 2029: > 1 000 employees and > 450 M€ net worldwide turnover

Due diligence obligations

Companies shall conduct risk-based human rights and environmental due diligence by carrying out the following actions – coherent with the six steps defined by the OECD Due Diligence Guidance for Responsible Business Conduct:

  • Integrate due diligence into their policies and risk management systems in accordance with Article 5.
  • Identify and assess actual or potential adverse impacts in accordance with Article 6 and, where necessary, prioritise potential and actual adverse impacts in accordance with Article 6a.
  • Prevent and mitigate potential adverse impacts, and bring actual adverse impacts to an end and minimize their extent in accordance with Articles 7 and 8.
  • Provide remediation to actual adverse impacts in accordance with Article 8c.
  • Carry out meaningful engagement with stakeholders in accordance with Article 8d, in particular to gather the necessary information on actual or potential adverse impacts.
  • Establish and maintain a notification mechanism and complaints procedure in accordance with Article 9.
  • Monitor the effectiveness of their due diligence policy and measures in accordance with Article 10.

And:

  • Publicly report on due diligence in accordance with Article 11, by publishing on the website an annual statement, or by complying to sustainability reporting requirements under CSRD. From 2029, companies need to make the reporting digitally accessible on the European Single Access Point (ESAP)
  • Retain documentation regarding the actions adopted to fulfill their due diligence obligations for the purpose of demonstrating compliance, including supporting evidence, for at least 5 years or as long as there is an ongoing judicial or administrative proceeding under the CSDDD.

The company shall

  • Take appropriate measures to identify and assess actual and potential adverse impacts arising from their own operations or those of their subsidiaries and, where related to their chains of activities, those of their business partners.
  • Map their own operations, those of their subsidiaries and, where related to their chains of activities, those of their business partners, in order to identify general areas where adverse impacts are most likely to occur and to be most severe.
  • Based on the results of that mapping, carry out an in-depth assessment of the own operations, those of their subsidiaries and, where related to their chains of activities, those of their business partners, in the areas where adverse impacts were identified to be most likely to occur and most severe.
  • Prioritise requesting such information, where reasonable, directly from business partners where the adverse impacts are most likely to occur.

As a last resort, company shall be required to refrain from entering into new or extending existing relations with a business partner in connection with or in the chain of activities of which potential adverse impacts has arisen that could not be prevented or adequately mitigated.

Scope of responsibility, in short

The CSDDD contains a risk-based approach: an in-scope company has the obligation to take measures if it is directly responsible for the CSDDD-risks and actual impacts.

Otherwise, the responsibility extends to a general duty of care of the in-scope company.

The CSRD applies to a company’s value chain whereas the CSDDD applies to a company’s ‘chain of activities’ meaning:

  • activities of a company’s upstream business partners related to the production of goods or the provision of services by the company,
  • including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of the products and development of the product or the service, and
  • activities of a company’s downstream business partners related to the distribution, transport and storage of the product, where the business partners carry out those activities for the company or on behalf of the company.

The CSDDD does not cover the disposal of the product, nor the activities of a company’s downstream business partners related to the services of the company.

Combating climate change (article 15)

Companies shall adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, that the business model and strategy of the company are compatible with the:

  • transition to a sustainable economy
  • limiting of global warming to 1.5 °C in line with the Paris Agreement
  • objective of achieving 2050 climate neutrality targets.

The transition plan shall be updated every 12 months and include a description of the progress the company has made towards achieving the targets.

Companies that report a transition plan for climate change mitigation in accordance the sustainability reporting requirements under CSRD shall be deemed to have complied with the adoption obligation.

The design of the transition plan referred to in the first subparagraph shall contain:

  • time-bound targets related to climate change for 2030 and in five-year steps up to 2050 based on conclusive scientific evidence and including, where appropriate, absolute emission reduction targets for greenhouse gas for scope 1, scope 2 and scope 3 greenhouse gas emissions for each significant category;
  • a description of decarbonisation levers identified and key actions planned to reach targets referred to under point (a), including where appropriate changes in the undertaking’s product and service portfolio and the adoption of new technologies;
  • an explanation and quantification of the investments and funding supporting the implementation of the transition plan;
  • a description of the role of the administrative, management and supervisory bodies with regard to the plan.

System of control, penalties and liability

  • An administrative supervision and sanctions, including “naming and shaming” and maximum penalties of not less than 5% of the net worldwide turnover of the company in the financial year preceding the fining decision (article 20).
  • Strong possibilities for civil enforcement, as in-scope companies will be liable for damages caused by a breach of their obligations under the CSDDD (article 22).

An in-scope company can be held liable for damages caused to a natural or legal person, provided that the in-scope company intentionally or negligently failed to comply with the obligations under the CSDDD, and as a result of such failure to comply, damages to the natural or legal person’s legal interest protected under national law was caused.

An in-scope company cannot be held liable if the damage was caused only by its business partners in its chain of activities.

You are welcome to contact us if you need to put a policies and risk management system in place to comply with – and report on – CSDDD and CSRD.

Source: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CONSIL:ST_6145_2024_INIT

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Provisional deal on the corporate sustainability due diligence directive

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EU has reached a provisional deal on the corporate sustainability due diligence directive (CSDDD), which aims to foster sustainable and responsible corporate behaviour throughout global value chains.

Large companies will be required to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights, such as child labour and exploitation of workers, and on the environment, for example pollution and biodiversity loss.

This Directive will apply to the company’s own operations, its subsidiaries and their value chains.

What you need to do

In order to comply with the corporate risk-based due diligence duty, companies need to:

  • integrate due diligence into their policies
  • take appropriate measures to:
  • identify, assess and, where needed, prioritise actual or potential adverse human rights and environmental impacts
  • prevent or mitigate potential adverse impacts
  • bring to an end, minimise and remedy actual adverse impacts
  • establish and maintain a notification mechanism and complaints procedure
  • monitor the effectiveness of the due diligence policy and measures
  • publicly communicate on due diligence.

Companies that do not comply with these rules will face sanctions from national administrative authorities.

Victims will have the opportunity to seek legal redress for damages that they suffer as a result of the failure to conduct appropriate due diligence.

Furthermore, EU companies of substantial size and economic power – meeting threshold (1) below – will be required to adopt transition plans and make best efforts to ensure that their business strategy is compatible with limiting global warming to 1,5 °C.

The new diligence rules will apply to:

  • (1) EU limited liability companies of substantial size and economic power, i.e. with more than 500 employees and a net global turnover of more than €150 million
  • (2) EU limited liability companies that operate in specific high-impact sectors with more than 250 employees and a net global turnover of €40 million
  • (3) non-EU companies meeting the above thresholds with turnover generated in the EU.

The political agreement reached by the European Parliament and the Council is now subject to formal approval by the co-legislators.

Once published in the Official Journal, the Directive will enter into force 20 days after publication and Member States will have 2 years to transpose the provisions of the Directive into national law.

Source: Rules enforcing rights and environmental sustainability (europa.eu)