The newly enacted Corporate Sustainability Due Diligence Directive (CSDDD) in the European Union (EU) is a landmark regulation designed to compel companies to take definitive and concrete actions to strengthen their sustainability, human rights, and environmental practices. Unlike its predecessor, the Corporate Sustainability Reporting Directive (CSRD), which primarily focuses on disclosure and transparency of sustainable practices, the CSDDD mandates more proactive steps. Companies must perform due diligence on their operations and value chains, identifying, preventing, mitigating, and accounting for human rights and environmental risks. As these rules go into effect by July 2027, it is crucial for organizations to begin preparing immediately to comply with these extensive requirements.
1. Begin with a Gap Assessment
Conducting a comprehensive gap assessment is the first step towards preparing for the implementation of CSDDD requirements. CFOs and their teams should start by evaluating how their organization is currently affected by these new mandates. This means assessing existing due diligence processes and mechanisms to determine what measures are already in place that align with CSDDD’s stipulations. With a thorough understanding of the current state, CFOs can then outline responsibilities for each aspect of due diligence and identify the necessary steps to close the gap between current practices and what is required for compliance. A focal point of this scrutiny should be on supplier contracts and service level agreements (SLAs), as these will need significant adjustments to meet the new requirements.
Moreover, this initial gap analysis can reveal opportunities for increasing operational efficiency. For instance, organizations might uncover duplicate responsibilities or redundant activities, particularly during the supplier onboarding process. Identifying and eliminating these inefficiencies not only aids compliance but also enhances overall productivity. This phase also helps in forecasting resource requirements and identifying necessary technological supports, thus laying down a solid foundation for a well-coordinated transition to CSDDD compliance.
2. Evaluate the Overall Expenses of Remediation
Once the gaps have been identified, the next critical step involves a thorough evaluation of the total costs associated with CSDDD compliance. CFOs must calculate the expenses linked to remediating any identified environmental or human rights liabilities. The cost of addressing these issues can be significant, especially once the company discloses them, even if such disclosure does not result in immediate regulatory penalties. Accounting for these expenses proactively helps the organization allocate resources effectively and avoid financial surprises down the line.
Furthermore, it is essential to consider the ongoing costs of achieving and maintaining compliance. This includes regular updates to processes, continued monitoring and reporting, and periodic training for relevant staff. CFOs should also be mindful of the costs associated with potential non-compliance. Violations of CSDDD can lead to hefty regulatory penalties and civil liabilities, not to mention the reputational damage and brand image erosion that can follow high-profile breaches of compliance in human rights or environmental standards. By anticipating these costs, organizations can better prepare financially and strategically for sustained compliance efforts.
3. Identify Chances to Merge CSDDD Compliance with CSRD, ERM, and TPRM
To create a more streamlined and effective compliance strategy, companies should look for opportunities to integrate CSDDD compliance efforts with existing frameworks such as the CSRD, Enterprise Risk Management (ERM), and Third-Party Risk Management (TPRM). The data gathered through CSDDD due diligence for supply chain practices can be leveraged to meet CSRD disclosure requirements. Moreover, the transition plans mandated for climate change mitigation reporting under CSRD can provide a head start on the climate transition plans required under CSDDD.
CFOs should also ensure that the processes established for CSDDD compliance are integrated into their organization’s broader risk management activities. This integration can help avoid duplicative efforts and ensure a cohesive approach towards risk mitigation. Given their oversight of ERM capabilities and TPRM activities, finance leaders are in a prime position to minimize redundant work while maximizing the effectiveness of compliance measures. Furthermore, leveraging their expertise in regulatory reporting, data governance, and audit trails ensures that CSDDD initiatives are based on sound, data-driven evidence.
Big Changes Affecting Thousands of Companies
The significance of CSDDD compliance extends beyond EU-based companies. Non-EU companies generating substantial revenue within the EU—more than €450 million annually—must also comply with the directive starting in 2027, 2028, or 2029, based on their EU revenue amounts. This directive’s extensive scope necessitates cross-functional coordination, involving finance, risk management, supply chain operations, HR, IT, legal, and compliance teams. As multinational companies and their suppliers adjust to meet these regulations, the impact will be far-reaching. New supplier codes of conduct, whistleblower hotlines, media monitoring for human rights violations, updated strategic sourcing, third-party risk management governance, and rigorous data collection will become standard practices.
EU member states have until July 2026 to adopt the directive into their national law, further complicating compliance efforts due to potential variations in enacted requirements. Moreover, existing national due diligence regimes will overlap with CSDDD requirements, adding complexity and necessitating careful coordination. Companies already adhering to national laws such as the French Duty of Vigilance Law or the UK Modern Slavery Act may have a head start, but they must still address both sets of rules concurrently. By preparing now, organizations can ensure smoother CSDDD compliance and avoid the disruptions that last-minute changes could cause.
Mind the Gap—and Hidden Costs
After identifying the gaps, the next critical step is to thoroughly evaluate the total costs associated with CSDDD compliance. CFOs must assess the expenses involved in addressing any identified environmental or human rights liabilities. These costs can be substantial, especially once the company discloses them, even if there are no immediate regulatory penalties. Proactively accounting for these expenses allows the organization to allocate resources efficiently and prevent financial surprises.
Additionally, it’s crucial to consider the ongoing costs of achieving and maintaining CSDDD compliance. This encompasses regular updates to processes, continued monitoring, reporting, and periodic training for staff members. CFOs should also consider the costs linked to potential non-compliance. Violations can lead to significant regulatory penalties and civil liabilities, as well as reputational damage and brand erosion resulting from high-profile breaches in human rights or environmental standards. Anticipating these costs ensures organizations are better prepared financially and strategically for ongoing compliance efforts.
