The CSDDD: How the Phoenix Can Rise from the Ashes

There was no shortage of disappointment and discourse from all sides during the recent negotiations on the EU’s Corporate Sustainability Due Diligence Directive (CSDDD). Opinions were plentiful, diverse, passionate, and the gloves certainly came off in the final round.

The debate played out amongst ourselves, where on February 5, 2024  one of us (Eccles, a Democrat) waded into the debate with a piece with Dan Crowley (his Republican friend) taking a critical view of CSDDD. It received a number or comments when it was posted on LinkedIn; far more negative ones than positive. Another one of us (Webster, a good friend of Bob’s) bitingly wrote that ‘I think you can do better than this” and “your comment about extraterritorial reach into the US made me snort my cup of tea…the irony.”

A formal response came on February 8, 2024 when the third of us (Gardiner, a colleague of Webster’s at the World Benchmarking Alliance) published a rebuttal piece with Rebecca DeWinter-Schmitt of the Investor Alliance for Human Rights. This piece took the exact opposite approach, focusing on the upside of the law. This demonstrated how the legislation has sparked a fervent debate — even amongst friends — underscoring the complexities of aligning corporate practices with sustainability goals through legislation.

Interestingly, all three of us came to the discussion with a different geographical lens. As most will already know, Eccles is neck-deep in the anti-ESG war which continues to rage on in the U.S., very much bringing the U.S. context to the discussion. Gardiner is a seasoned Brussels operative, emersed in the nuance of European legislation. Webster, having spent the majority of her career in asset management in Asia, brings an emerging markets lens and experience on how extraterritorial reach passes down value chains and influences finance. 

So, were these different views irreconcilable or could there be a meeting of minds?

Eccles suggested a call to explore if this was indeed possible. Thankfully everyone was willing to do so. It was a constructive and instructive call where both Eccles and the WBA informed each other of their thinking. It also opened up an ongoing dialogue as CSDDD worked its way through the political process.

We watched a highly unusual political process unfold, seeing tectonic shifts in how the business happens in the EU. The typical method of one side going high and the other going low missed the patient but guiding hand of even-handed and pragmatic German politics. Where once consensus would be found sooner, effectively a vacuum was created by the lack of a clear majority. One clear lesson going forward is the need for openness and transparency from everyone at the negotiating table to enable a strong Presidency to build a lasting consensus. While taken beyond the eleventh hour, that consensus was finally unanimously reached.

So now that CSDDD has passed through the penultimate round of political approval, did we reach a common view on its impact? The answer is a surprising “Yes,” and this piece is intended to share our common view. Where we have emerged from our discussions is that CSDDD has appeared to have landed at a unique compromise of ambition vs pragmatism.

While significant compromise was made, the final adjustment of the text focuses directly on the largest companies in the EU with the eventual scope set to cover companies with more than 1,000 employees and €450 million in revenues. This puts the final company scope at approximately 5,300 companies. This avoids clouding the debate on the burden to SMEs as they are removed from the line of fire. Instead, it is designed as a strategic compass that can help businesses plot a path knowing the direction of travel wanted by policyholders and stakeholders, beyond their traditional shareholders.

Business and finance like certainty, and the passing of CSDDD removes the “will they won’t they?” question. The same cannot be said for the SEC’s climate disclosure rule. The ink was barely dry on it being passed when lawsuits were launched from the right (e.g., the US Chamber of Commerce and a number of red state attorney generals) and the left (e.g., the Sierra Club and the NRDC). The SEC has put a voluntary stay on the rule in an effort to speed up the litigation process. While these lawsuits move through the courts, likely to be resolved by the Supreme Court at some unknown time, this leaves U.S. companies in a high state of uncertainty. At the same time, many of the larger ones are grappling with the implications of the Corporate Sustainability Reporting Directive (CSRD) and now the CSDDD.

The final agreement acknowledges the complex challenges businesses face in aligning on sustainability issues. These goals, ranging from combating climate change to protecting human rights, will require both transformational thinking AND leadership on business conduct. Innovation and new business models will be essential to accomplishing the goals of the CSDDD. So, setting a minimum set of legal standards and initially applying them to large companies who have the resources and expertise to meet them makes sense. It will build a common understanding of what good supply chain due diligence looks like and help prepare the rest of the market. In other words, the bigger companies need to lead.  Transformational change happens slowly and typically needs the big players to help move the market first.

Beyond setting this important, and much-needed, precedent on companies’ responsibility through their supply chains beyond short-term profits, the CSDDD can be a catalyst for long-term value creation and prevent market fragmentation with the creation of 27 different due diligence regimes in the EU single market. The CSDDD will also improve the quality of transparency from the CSRD reporting which will also raise the stakes in making doing the right thing consequential to business. If implemented properly it can also help companies obtain a competitive advantage. This is a big ”if,” which we all agreed was crucial.

We acknowledged that this value creation is not going to happen simply as a result of the CSDDD. It will all depend on the approach businesses take to its implementation; those that see it as a compliance box-ticking requirement will miss the opportunity to turn it into value-creation.  Those that read the direction of travel will use the information to inform their decision-making and truly integrate sustainability into their core strategy. This should enable them to unlock new opportunities, drive innovation and productivity, and ultimately build resilience against future structural supply shocks from changing policy, client, and employee demands. The CSDDD, therefore, should not be a barrier but a long-term bridge to a sustainable and profitable future. Throughout the world companies are fond of saying that a commitment to sustainability is core to their strategy and value creation. The CSDDD challenges them to make sure their deeds match their words.

We tousled over the additional benefits of transparency and accountability of business, and inevitability materiality came into the conversation. By applying robust due diligence measures, it will enrich data and clarify the “double materiality” (financial plus impact materiality) reporting under the CSRD. In essence, the CSDDD will become the defining factor for double materiality assessments. This, in turn, will furnish stakeholders—including consumers, investors, and civil society—with more detailed information to inform their purchasing and investing decision-making. This can drive a virtuous cycle of showing what is and isn’t possible and help raise the bar in industry. Importantly, it will pinpoint where policy levers are needed or where civil society can support and push for change.

One area which took up a significant amount of our discussion was cost. The major push back to the CSDDD is the increased cost to comply without any added benefit. What had got lost in the noise is that the need to perform supply chain due diligence already exists in many European countries, with a fragmented set of rules. Germany is the largest market in Europe that has existing regulations, with others having their own variations. Harmonization of regulation is a constant ask of business and finance. The CSDDD should create that much needed harmonization. There was significant risk that had it not passed, countries would have individually mapped out their own rules. Undoubtedly this would not be good for business’s bottom line and would cause confusion further along supply chains on which song sheet to sing from.

We also addressed the unavoidable elephant in the room: nationalism. Gardiner confirmed that the CSDDD will not have extraterritorial reach into the U.S. and where there is indirect reach, there may be some instances where entities are restructured to become out of reach. However, there are limited options in reality as typical European havens do not have appropriate frameworks and approval mechanisms to transfer business to. Much debate has taken place on how to ensure responsibilities are not simply pushed down supply chains, with specific wording in the legislation aimed at preventing this. While clearly the aim of the CSDDD is to help put an end to human rights abuses and unfair work practices within supply chains that create competitive advantage, we must not cut off global supply chains. It is essential that it does not slow down, or at worst snuff out, the ability of countries to scale their energy transition at affordable prices by taking advantage of manufacturing capacity at lower prices. There must be a balance between meeting the needs of those worried about the end of the month with those worried about the end of the world, both of which need a healthy, sustainable business environment.

However, as hinted at earlier, we agreed the legislation will have a positive impact and add business-value if it is well applied and properly enforced. A playing field which is both level and fair can only come from a collaborative, multi-stakeholder process.

While the CSDDD aims to be the blueprint, governments must now create an enabling environment for businesses to thrive within its framework. This includes providing guidance, support, and incentives for companies to adopt sustainable business practices. Furthermore, governments must foster productive partnerships between the public and private sectors, leveraging their respective strengths to achieve common goals.

Eccles was concerned about different levels of implementation across Europe, with Gardiner acknowledging that regional variation on poorly applied or omission of certain parts of a directive is not a CSDDD specific problem.  What we need now is for governments, businesses, civil society, and international organizations to come back together to define the implementation of the directive. Even those with differing opinions. We need the sharing of best practices, the development of innovative solutions, and the mobilization of resources necessary for addressing the challenges thrown up. We must avoid a sudden fragmented surge of last-minute action a few weeks before the application date, and an outcome that misses the intended benefits and causes unintended pain down supply chains.

The political process, always a long and winding one, has made a determination which reflects the will of the people in the EU regarding the role of the corporation in society. The CSDDD—with all its nuances, complexities, and remaining controversies–now needs to be seen as a call to action for businesses, governments, and civil society to engage in a collaborative effort. Hopefully, like our dialogue, scepticism and challenge can evolve into mutual recognition of the directive’s aim to raise the bar for better business.