Policy Paper: Interconnection between the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive

1. Introduction

The European Union (EU) is at the forefront of integrating sustainability into corporate governance and reporting through legislative initiatives. Two key directives—the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D)—play pivotal roles in enhancing corporate accountability and transparency concerning sustainability matters. This policy paper examines how the CSRD and CS3D are interconnected, highlighting their complementary roles in promoting sustainable business practices within the EU.

2. Overview of the CSRD

The CSRD, adopted in 2021, amends the existing Non-Financial Reporting Directive (NFRD) and significantly broadens the scope and detail of sustainability reporting requirements for companies.

Key elements of the CSRD:

• Expanded Scope: Applies to all large companies and all companies listed on regulated markets, excluding micro-enterprises.
• Comprehensive Reporting: Requires detailed disclosures on environmental, social, and governance (ESG) factors.
• Assurance Requirement: Mandates third-party assurance of sustainability information.
• Digital Reporting: Introduces the European Single Electronic Format (ESEF) for digital reporting of sustainability information.

3. Overview of the CS3D

The CS3D, adopted on 24 April 2024, aims to foster sustainable and responsible corporate behavior throughout global value chains by implementing due diligence obligations related to human rights and environmental standards.

Key elements of the CS3D:

• Due Diligence Obligations: Requires companies to identify, prevent, mitigate, and account for actual and potential adverse human rights and environmental impacts in their operations and value chains.
• Scope: Applies to large EU companies, non-EU companies active in the EU, and high-risk sectors.
• Corporate Governance: Stipulates that sustainability considerations be integrated into corporate policies and management systems.
• Enforcement and Penalties: Establishes mechanisms for enforcement, including penalties for non-compliance.

4. Interconnections between the CSRD and CS3D

The CSRD and CS3D are intrinsically linked, creating a cohesive framework that enhances corporate accountability, transparency, and responsibility towards sustainability.

4.1. Comprehensive Sustainability Governance

Holistic Approach:

• CSRD: Focuses on transparent reporting of sustainability impacts, requiring companies to disclose their sustainability strategies, risks, and impacts.
• CS3D: Emphasizes proactive measures by companies to prevent and mitigate adverse impacts through due diligence processes.

Mutual Reinforcement:

• The CS3D's due diligence processes provide the substantive basis for the disclosures required under the CSRD. Companies must not only report on their sustainability impacts but also demonstrate how they are addressing these impacts through robust due diligence practices.

4.2. Integrated Reporting and Due Diligence

Disclosure of Due Diligence Practices:

• CSRD: Companies are required to report on their due diligence processes, including policies and measures taken to identify and mitigate adverse sustainability impacts.
• CS3D: Establishes the requirements for these due diligence processes, ensuring that companies systematically address human rights and environmental risks.

Transparency and Accountability:

• The CSRD enhances transparency by mandating detailed disclosures on how companies implement their due diligence obligations under the CS3D. This integration ensures that stakeholders can assess the effectiveness of a company's sustainability efforts.

4.3. Corporate Governance and Management Systems

Board Responsibility and Oversight:

• CS3D: Requires companies to integrate due diligence into corporate policies and ensure board oversight of sustainability risks and impacts.
• CSRD: Mandates disclosures on the role of administrative, management, and supervisory bodies in overseeing sustainability matters, including due diligence.

Alignment of Corporate Strategies:

• The directives collectively promote the alignment of corporate strategies with sustainability goals, ensuring that governance structures support responsible business practices.

4.4. Assurance and Verification

Third-Party Assurance:

• CSRD: Introduces requirements for third-party assurance of sustainability reports, enhancing the credibility of disclosed information.
• CS3D: Encourages companies to obtain independent verification of their due diligence processes, which can be integrated into the assurance requirements under the CSRD.

Consistency and Reliability:

• The alignment of assurance and verification processes under both directives ensures consistent and reliable reporting, providing stakeholders with trustworthy information.

4.5. Digital and Accessible Reporting

European Single Electronic Format (ESEF):

• CSRD: Mandates the use of ESEF for digital reporting, facilitating accessibility and comparability of sustainability data.
• CS3D: Digital reporting requirements under the CSRD include due diligence information, ensuring comprehensive and accessible disclosure of sustainability practices.

5. Conclusion

The CSRD and CS3D are complementary pillars of the EU's sustainability framework, jointly enhancing corporate transparency, accountability, and responsibility. The CSRD's robust reporting requirements ensure that companies disclose comprehensive information on their sustainability impacts and due diligence practices mandated by the CS3D. Together, these directives promote sustainable business practices, protect human rights, and mitigate environmental risks across global value chains.

Recommendations for Policymakers:

• Harmonization: Ensure that the implementation of CSRD and CS3D is harmonized to avoid duplication and streamline compliance processes for companies.
• Capacity Building: Provide support and guidance to companies, particularly SMEs, to help them meet the comprehensive requirements of both directives.
• Stakeholder Engagement: Foster continuous dialogue with stakeholders to ensure that reporting and due diligence frameworks meet their needs and enhance corporate accountability.
• Monitoring and Evaluation: Establish mechanisms to monitor and evaluate the effectiveness of the CSRD and CS3D, making necessary adjustments to enhance their impact and ensure alignment with evolving sustainability standards.

By aligning reporting and due diligence obligations, the EU can foster a more sustainable and resilient corporate sector, contributing to broader environmental and social goals.

Recommendations for Companies

1. Integrate Sustainability into Core Strategy: Embed sustainability into the core business strategy and operations. Ensure that sustainability goals align with the overall mission and vision of the company. This alignment will help in meeting the requirements of both CSRD and CS3D seamlessly.
2. Develop Robust Reporting Systems: Implement comprehensive reporting systems that capture all relevant sustainability metrics. Use these systems to generate accurate and timely reports that comply with CSRD standards. This includes the development of digital reporting capabilities in accordance with the European Single Electronic Format (ESEF).
3. Establish Effective Due Diligence Processes: Develop and implement thorough due diligence processes to identify, assess, and mitigate risks related to human rights, environmental, and governance issues as outlined by CS3D. Ensure these processes cover the entire value chain, including suppliers and other business partners.
4. Enhance Corporate Governance: Strengthen the roles and responsibilities of the board and senior management in overseeing sustainability initiatives. Ensure that they have the necessary expertise and are actively involved in setting and reviewing sustainability targets and performance.
5. Invest in Training and Awareness: Provide regular training and awareness programs for employees at all levels to ensure they understand the importance of sustainability and their role in achieving the company’s sustainability objectives. This includes specific training on due diligence and reporting requirements.
6. Engage Stakeholders: Foster open and transparent communication with all stakeholders, including employees, customers, investors, and communities. Engage them in sustainability initiatives and consider their feedback in the company’s sustainability strategies and reporting.
7. Leverage Technology and Innovation: Utilize advanced technologies and innovative solutions to enhance sustainability performance. This includes investing in data analytics, digital tools, and other technologies that can improve reporting accuracy and efficiency.
8. Seek Third-Party Assurance: Obtain third-party assurance for sustainability reports to enhance their credibility and reliability. This external validation can help build trust with stakeholders and ensure compliance with both CSRD and CS3D requirements.
9. Monitor Regulatory Developments: Stay informed about regulatory changes and updates related to sustainability reporting and due diligence. Proactively adapt to new requirements to ensure continuous compliance and maintain a competitive edge.
10. Foster a Culture of Sustainability: Promote a corporate culture that values sustainability and ethical business practices. Encourage innovation and continuous improvement in sustainability performance, making it a shared responsibility across the organization.

By following these recommendations, companies can effectively navigate the complexities of CSRD and CS3D, ensuring compliance and leveraging these directives to drive sustainable growth and long-term success.