Understanding the Effects of the Corporate Sustainability Due Diligence Directive
What is the CSDD directive?
The European Parliament has recently taken a noteworthy step towards promoting sustainability by adopting its stance on the Corporate Sustainability Due Diligence Directive (CSDD) with the objective of establishing corporate responsibility and diligence pertaining to sustainability concerns and human rights violations throughout the supply chain.
The CSDD framework applies to organizations with a workforce of more than 250 individuals and a revenue surpassing €40 million in Europe (or €150 million worldwide). The framework prioritizes the prevention, identification, and mitigation of adverse effects on human rights and the environment.
The real impact on sustainability and corporate responsibility
The CSDD has a specific emphasis on issues related to climate, mandating that organizations implement climate objectives and transition strategies that are grounded in scientific evidence and consistent with the Paris Agreement’s aim of restricting temperature escalation to less than 1.5 degrees Celsius. Additionally, the aforementioned directive stipulates that the integration of climate objectives is compulsory in the variable compensation packages of senior executives. In relation to environmental concerns, the Parliament delineates crucial facets that require monitoring by companies. These include climate change, biodiversity depletion, pollution of air, water, and soil, degradation of ecosystems, deforestation, overconsumption of resources, and the production and management of hazardous waste.
Key challenges and considerations
One of the primary areas of disagreement pertains to the question of whether the directive should encompass financial institutions. The European Parliamentarians have proposed a draft that recommends the extension of due diligence regulations to encompass the financial sector, specifically asset managers and institutional investors. However, the draft also stipulates that pension funds, alternative investment funds, market operators, and credit rating agencies should be excluded from this extension. Nevertheless, certain non-governmental organizations have expressed disapproval of this compromise, arguing that accountability ought to encompass more than just immediate customers. In contrast, the accord that was achieved by European ministers, primarily under the impetus of France, omitted financial institutions from its purview, thereby rendering their compliance with due diligence measures as discretionary.
The Parliament has emphasized the need for consensus on defining the scope of the supply chain, which should include not only upstream activities but also downstream activities such as sales, distribution, transportation, storage, and waste management of products and services.
Reshaping sustainable metrics
The Corporate Sustainability Due Diligence Directive serves to strengthen the significance of sustainability and conscientious corporate conduct. By adhering to the Corporate Sustainability and Disclosure Directive (CSDD) and emphasizing sustainability metrics, firms can establish themselves as pioneers in their respective sectors, attracting investors, customers, and stakeholders who value ethical and sustainable business practices. The adoption of sustainable practices not only yields positive outcomes for the natural world and human communities but also serves as a catalyst for enduring commercial prosperity.
Physis Investment is a fintech company that offers investors a variety of sustainability tools and data to track the impacts of their investments. We make it easy for institutional investors to prove the sustainability of a company or fund beyond the ambiguous ESG score.