If you’ve not heard of CSRD with (ESRS) and CSDDD (CS3D) – read on – the readiness window is closing.
There’s been a great focus, in the UK in particular, on Net Zero and addressing Scope 1, 2 and 3 emissions to drive decarbonisation in the workplace and supply chain. Typically achieved by following the GHG Protocol which is the de facto standard for Carbon Accounting (CA). You’ll know from my prior articles that CA is at the core of what I do, because just like in Financial Accounting (FA) if you don’t have the numbers, that is the data to work with, then your ESG / Net Zero journey is stalled from the start. With that data in hand you can now start to define your decarbonisation journey and pathway to Net Zero.
But not so fast. As I wrote recently Net Zero in context of Corporate Sustainability is not the end goal, the goal is systemic organisational change and understanding the impact on planet, people and profit of business activities from the perspective of double-materiality – then doing something about it.
The EU’s Corporate Sustainability Reporting Directive (CSRD) enshrines double materiality in the forms of a) financial materiality (ESG concerns that impact the organisation’s profit) and b) impact materiality (ESG concerns that impact people and planet). In support of Corporate Sustainability CSRD focuses on transparency, accounting for double materiality assessments, identifying negative and positive externalities, assessing sustainability risks and developing and executing Climate Transition Plans.
That’s all good – but where’s the accountability? That’s where the Corporate Sustainability Due Diligence Directive (CS3D) becomes relevant. CS3D requires not just the identification of ESG dual-impacts but the prevention and mitigation of the adverse effects of these. While both CSRD and CS3D require public reporting, they combine transparency and accountability to form a much needed Plan-Do-Check-(Report)-Act lifecycle within an organisation’s ESG framework.
Due Diligence is Key
If effective ESG requires understanding the impact of corporate activities on people, planet and profit then it’s clear the path to Corporate Sustainability and Net Zero requires understanding risks, mitigating ‘adverse impacts’ combined with remediation and prevention where they occur.
But what are some examples of Due Diligence (DD) that are mandated in CS3D that might help mitigate, remediate or prevent adverse impacts of externalities that are likely to be risks for Corporate Sustainability?
Let’s look at what DD in context of CS3D entails.
1) Identification of Risks – Like any good project management or change programme activity, which ESG should be seen as, there needs to be a level of inductive and deductive analysis of risk related to adverse impacts contextualised to the organisation. This is done by mapping the organisation’s operations and that of their subsidiaries and ‘Tier 1’ business partners in the value chain.
Risks that CS3D includes are forced labour, safety and liberty violations, unjust working conditions, deforestation, pollution, biodiversity loss and other human rights or environmental harms. Changes to the CS3D scope, particularly from Omnibus 1, are considered possible channels to limit the directives effectiveness in this area so it will be the responsibility of organisations to identify and declare these types of risks with openness and integrity.
2) Prevention and Mitigation – Once risks are identified the organisation must put in place ‘appropriate measures’ that will wholly prevent these risks or at least minimise them where prevention is not possible.
For the former this could include cross collaboration with the organisation’s Legal team to ensure contracts for services have effective clauses in, with enforceable penalties and sanctions defined if they are not met. To ensure this supplier audits would need to be undertaken. These would of course be more extensive in scope than those carried out in relation to GHG Protocol Scope 3 CA activities, but would provide a useful foundation to build off. For the latter, supplier training as part of a clear remediation plan would be one approach, likely delivered in a multi-phase programme to mature the supplier organisation to a level where they can achieve compliance.
3) Monitoring and Effectiveness – DD is not a process that is one-and-done. The process will be ongoing, likely over a multi-year timespan, and as such needs a well designed set of metrics and measures to be agreed, maintained and analysed.
KPIs and feedback loops are essential components of this, but measures that indicate both quantifiable objective and sentiment based subjective data will be important. A focused set of strategic goals to which the metrics and measures apply will also be essential – to ensure that in combination the right things are being monitored in the right way. The ultimate aim of which is to ensure the appropriate measures being put in place for risk mitigation and elimination have been demonstrably effective.
4) Grievance and Remediation – There is a ‘legal duty of care’ under CS3D to identify, prevent, mitigate and remedy adverse impacts on human rights and the environment (in ESG terms, people and planet) (for examples see Risks above). CS3D states this duty of care applies to a) the organisation’s own operations, b) the organisation’s subsidiaries and c) the ‘chain of activities’, which mirror the Tier 1 upstream and downstream supply chain partners covered by GHG Scope 3 CA processes.
This therefore brings us almost full-circle back to stakeholder engagement across the organisation, subsidiaries and Tier 1 Suppliers. As part of this legal duty of care there has to be a grievance mechanism in place so that stakeholders affected by failures of DD processes, and Corporate Sustainability activities in general, can raise concerns and seek remedies. This means as a CSO or Sustainability Manager you’ll need to establish a matrix-organisation that likely includes some or all of Accounts, Procurement, Legal, HR and the Communications teams.
5) A Climate Transition Plan – All organisations must adopt a Climate Transition Plan (CTP) that is in alignment with the Paris Agreement’s 1.5°C goal, including measurable targets, end-point and intermediate targets, (scope) coverage, timelines, roadmap, resources, investments, dependencies, governance – essentially a strategic Project Plan.
This is a key document mandated by CS3D, but you should think of it more like a system – it has to factor in flexible scope, be modular and auditable, and of course adaptive to allow repositioning in light of new data, stakeholder input and policy change.
This plan also needs to be integrated into your organisation’s corporate processes, i.e. operationalised, giving further importance to working across the the matrix-organisation quasi team essential for success.
CSRD v CS3D
The Corporate Sustainability journey for most organisations I’ve worked with has commonly been:
- Step 1 – GHG Protocol and Carbon Accounting
- Step 2 – Mature to CSRD, leverage lessons learned and established quasi-organisations
- Step 3 – Layer in CS3D to address due diligence, remediation and grievance
This makes good sense. A core component of the CTP required by CS3D is value chain emissions, i.e. Step 1 GHG and CA above. If you don’t have those understood it’s not impossible to move to Step 2 and engage with CSRD, but it will introduce complexity that could have been pre-handled with more forethought about the Corporate Sustainability journey to be undertaken.
CSRD and ESRS
The European Sustainability Reporting Standards (ESRS) provides three key topical standards that sit under the CSRD. Each is focused on a pillar of ESG: Governance (profit), Social (people) and Environmental (planet). These provide a comprehensive framework for sustainability reporting in the combined CSRD / CS3D environment in-scope organisations find themselves.
- ESRS G1 – Governance
- ESRS S1 – Own Workforce
- ESRS E1 – Climate Change
Each of these topical standards define an area of focus and guidance on key disclosure areas. ESRS is a subject for another post as we’ve already covered a lot here.
What next?
The above has some extra nuances that will be covered in future articles. If you need clarity now or want to understand how to translate policy into practice – then book a 30 minute call with me, completely free.
In Closing
CSRD and CS3D (with ESRS [G1, S1, E1]) are mandatory legal requirements for in-scope organisations and are great to see for someone who advocates for Integrated Reporting as I do. Omnibus 1 narrowed the focus of the directives to the largest companies, so that “those with the greatest capacity and influence over their value chains bear the due diligence burden.” That’s good and bad, but again a subject for another post.
The Omnibus changes also sensibly shifted the focus from an entity-based approach to a risk-based approach and altered the provisions on CTPs by aligning them with CSRD. The adoption of which has been delayed by two years, allowing organisations to focus on readiness for the now delayed transposition deadlines. The readiness window is essentially now, closing between July 2028 and July 2030 dependent on organisation scale.
As mentioned, if you need clarity now or want to understand how to translate policy into practice – then book a 30 minute call with me, completely free.
VC
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References:
- CSDDD – Corporate Sustainability Due Diligence Directive (CS3D)
- CSRD – Corporate Sustainability Reporting Directive
- ESRS – European Sustainability Reporting Standards
- GHG Protocol – GHG Accounting Protocol
- ISSB – International Sustainability Standards Board
