CSRD and CSDDD 101: Essential insights for EU businesses

The current landscape of corporate sustainability reporting is a complex and ever-progressive web of regulatory disclosures, with global developments impacting businesses in every jurisdiction. In the third webinar from our Global Outlook series, Subject Matter Expert in Sustainability & ESG, Marion Kerestedjian, highlighted the key insights and updates in corporate sustainability, with particular attention to the CSRD and CSDDD. 

In this article, we detail the main takeaways from the presentation on the CSRD and CSDDD. Watch the full recording here for a more thorough breakdown of the EU’s regulatory landscape, including new regulations concerning ESG.

EU transposition of the CSRD

A significant and ongoing development, Member States are in the process of transposing the Corporate Sustainability Reporting Directive (CSRD) into their national laws.  

With the transposition deadline now passed, more than half of the Member States have approved legal instruments aligned with the CSRD, namely enhancing reporting regulations. Some of these countries include: 

• France 
• Hungary 
• Italy 
• Sweden 
• Ireland 
• Denmark 
• Lithuania 
• Slovakia 

However, several Member States are still engaged in consultations or proposing initiatives to ignite their transposition process, including Spain, Belgium, and the Netherlands.
 

The infringement procedure 

The remaining Member States will need to complete transposition as soon as possible to avoid the consequences of an infringement procedure from the European Commission (EC). The EC has already taken legal action against several non-compliant Member States who have failed to meet obligations, launching their infringement procedure. 

The procedure is laid out as follows: 

• Formal notice to Member States concerned requiring further information 
• Member States have two months to submit a detailed reply to the EC 
• The Commission will then send a reasoned opinion concluding whether the Member State has failed to comply with EU law 
• Concerned Member States then have two further months to inform the EC of the measures taken 
• If the court concludes that the Member State has breached EU law, national authorities must take action to comply with the judgement 

The infringement procedure doesn’t have any direct impact on companies, but failure to transpose the CSRD in a timely manner could affect businesses, who will have less time to adapt their operations to the new sustainability obligations.
 

Which states are being targeted? 

The Commission has firstly called upon any Member States that have failed to transpose the CSRD by the deadline of 6 July 2024, which concerns Spain, Germany, and Belgium. However, the EC has also sent formal notices to states that have made some transposition efforts, but aren’t considered to be compliant enough with the CSRD. This concerns countries such as Finland, Romania, and Czechia, for example.  

As outlined by the aforementioned procedure process, if the Commission isn’t satisfied with the detailed responses from the Member States, it will ask the authorities of those states to submit information on the measures they’re taking to comply with EU law. 

If Member States don’t comply after the summons, the Commission will refer the issue to the Court of Justice and the concerned state would face conviction and penalties.

CSRD obligations after transposition

Once the directive is adopted at the national level, companies still need to navigate various aspects of the CSRD, which will result in some discrepancies across Member States.  

The CSRD established a baseline for Member States, so while states can expand on the provisions, they can’t undermine the directive nor its stringency. Members have control primarily over the procedures and technicalities for implementing the directive.  

• Scope of application — the scope of application may change to cover further companies 
• Assurance requirements — requirements for auditing the sustainability report could also vary in the determination of auditing entities 
• Employee consultation — some transpositions have extended the obligation to inform employees on sustainability matters 
• Extension of disclosures — extending sustainability obligations to go beyond what’s provided under the CSRD and to require whistleblowing reporting systems, for example 
• Translation and publication of the report — necessary in a globalized world where companies have subsidiaries in multiple jurisdictions or regions 
• Nature of sanctions for non-compliance — sanctions will differ by state 

For a more detailed breakdown of how these variations are being implemented across Member States such as Ireland, Italy, Sweden, and Slovakia, watch the webcast.

Corporate Sustainability Due Diligence Directive

One of the most crucial topics currently in European legislation, the CSDDD will require both EU and non-EU companies to assess and address the adverse impacts of their operations on human rights and the environment. This will concern their internal operations, as well as those of their subsidiaries and business partners across their entire chain of activities.  

The future timeline is laid out as follows: 

• 26 July 2026 — deadline for Member States to transpose the obligations of the CSDDD into their national legislation 
• 26 July 2027 — first threshold of application for companies with more than 5000 employees and global turnover exceeding EUR 1500 million 
• 2028 — application for companies with over 3000 employees and a global turnover of at least EUR 900 million 
• 2029 — application for all remaining companies falling within the scope, which includes companies with over 1000 employees and a global turnover exceeding EUR 450 million. This will also apply to non-EU companies with a net turnover in the EU of EUR 1500 million 

Once the directive becomes applicable, companies will face a range of new obligations ensuring effective corporate due diligence.
 

What are the obligations of the CSDDD? 

Companies will be required to carry out general due diligence, which involves conducting risk-based human rights and environmental due diligence. They will also have to take actions to mitigate, minimize, or eliminate these identified risks.  

The CSDDD will expect companies to achieve this by implementing necessary changes to their operations, production processes, and infrastructures where needed. Companies will also have to develop and implement a prevention action plan, as well as improve existing business strategies and purchasing practices.  

Additionally, the CSDDD establishes obligations to combat climate change, requiring businesses to develop and implement climate change mitigation transition plan that must align the company’s business model and strategy to meet the EU’s overall climate goals of limiting global warming to 1.5C and achieving climate neutrality by 2030.  

To summarize the obligations: 

• General due diligence 
• Adverse impacts remediation 
• Stakeholder engagement 
• Complaint mechanisms 
• Monitoring and reporting 
• Combating climate change

CSRD versus CSDDD

The CSRD and CSDDD have differing obligations so it’s important for companies to understand which regulations apply to their operations.  

While the CSRD applies an EU-centric approach, the CSDDD is potentially applicable for both EU and non-EU companies under certain conditions. The scope of the CSDDD is geographically wider, but it targets companies with higher thresholds.  

Additionally, the CSRD focuses on reporting requirements aiming to ensure transparency and prevent greenwashing while the CSDDD prescribes due diligence obligations to combat impacts on human rights or the environment.  

The application dates also vary, with the CSRD applying earlier than the CSDDD.