April 24 2024
The political fight for the Corporate Sustainability Due Diligence Directive (CSDDD) has come to a successful end. After today’s vote in the European Parliament, the proposal has finally been adopted, marking a win for corporate responsibility amidst a rising backlash against the region’s environmental regulations. With the upcoming European elections in June, this was achieved just in time to conclude the legislative process in this term – despite the significant watering down of the CSDDD’s scope and requirements.
Complementing the Corporate Sustainability Reporting Directive (CSRD) reporting requirements, the CSDDD mandates companies to take action on governance and due diligence processes. It sets a framework to improve how businesses operating in the EU manage human rights and environmental impacts in their operations and through their value chains.
And while the initial scope of the CSDDD has been watered down from the original proposal, the regulation will have significant ramifications both in Europe and globally.
The CSDDD’s scope, refined during the EU Council’s March 2024 compromise, now targets approximately 5,500 companies—a significant reduction from the initial 16,000. The loosening of the final text also means the implementation of requirements for some companies will be postponed.
The CSDDD will apply to both EU and non-EU companies depending on their workforce size and revenue:
EU companies (or the ultimate parent company of a group):
Non-EU companies (or the ultimate parent company of a group):
Companies falling under this scope must comply according to specific timelines defined by their workforce size and revenue:
While the financial sector was regrettably already excluded in the earlier stages of the draft law in 2023, this phase-in timeline to compliance was included by the EU Council in the March 2024 compromise to give smaller companies more time to prepare.
CDP data shows that many companies are well prepared to manage their climate impacts, and are thus well prepared for the implementation of the climate aspects of the CSDDD (with over half of companies reporting having climate transition plans in place). More than 4,200 European companies have board-level oversight of climate-related issues, over 3,800 companies have a process in place for identifying, assessing and responding to climate-related risks and opportunities and around 1,100 use scenario analysis to inform their strategy.
The CSDDD requires companies subject to it to develop a detailed climate mitigation transition plan (Art. 15, CSDDD). Companies will need to adopt and implement a transition plan “to ensure, through best efforts, that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with Paris Agreement and the objective of achieving climate neutrality” (Art. 15.1, CSDDD).
The reporting requirements of climate transition plans of the CSDDD are aligned with the requirements of the CSRD, thus ensuring no double reporting. These include:
Importantly, and worth emphasizing again, companies within the scope of both the CSRD and the CSDDD will not need to double report. The climate transition plan required by the CSDDD will be reported in the CSRD reporting, as long as the company adheres to the CSDDD’s implementation requirements for the transition plan.
Aligning the reporting requirements for climate transition plans across directives reduces the reporting burden for companies and ensures interoperability of environmental requirements. In 2022, more than 1,000 companies reported through CDP to have climate transition plans in place, a number which had climbed to more than 1,500 companies in 2023 – a positive sign for corporate action on climate impacts.
While CDP advocated for nature transition planning aspects to also be included in the CSDDD, we applaud the EU institutions for taking this important step in ensuring companies put forward credible climate transition plans as well as acting on them – our eight fundamental principles help guide organizations in the preparation of a credible plan (see CDP Climate Transition Report 2022).
It is however regrettable that the EU Council removed the requirement that companies link directors’ pay to long-term planning as part of their transition plans. Companies often motivate their top executives and board members to focus on climate issues by linking their rewards to the organization’s sustainability goals. More than 1,000 companies in the EU offer rewards to their top executives and/or board members for meeting specific goals, according to 2023 CDP data. Out of these, 80% of the reward systems disclosed by companies involve financial incentives. CDP evidence shows that the link between remuneration and long-term plans of companies as part of the governance of transition planning is feasible and already incorporated by many companies – in more than 850 companies in the EU, the incentive plans are linked to their long-term planning.
Despite the smaller scope of the law, the implications of the CSDDD throughout the supply chain will be significant.
CDP is already playing an essential role, working with 78 large companies in the EU to address climate impacts in their supply chains. These 78 companies request environmental information from over 15,000 companies globally, out of which more than 8,000 ultimately disclose to CDP – proving the significant impact that supply chain engagement can have both within and beyond the EU’s borders.
We remain committed to supporting companies on their disclosure and climate action journey. In 2024, we are making exciting changes to our corporate questionnaire and disclosure Portal to further streamline reporting for organizations and generate the most comparable and decision-useful data that is globally accessible, driving interoperability and helping companies prepare for incoming regulation.
The adoption of the CSDDD, while a scaled-down version of its original proposal, will significantly influence companies’ operations and supply chains around the world, ensuring that they play a pivotal role in mitigating climate impacts and building resilience through reporting and due diligence obligations.
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