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Blog | Monday June 17, 2024

A Coherent Approach to Sustainability Due Diligence and Reporting: Making Sense of CSDDD and CSRD

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Voluntary frameworks for companies to assess, address, and report on their sustainability impacts on people and the planet have existed for decades. Nevertheless, mandatory EU requirements are bringing new attention to the governance and robustness of these processes and demanding companies harmonize their approaches across issues and teams.

CSRD and CSDDD requirements are aligned in spirit, with a clear overlap in their scopes and obligations. However, some differences exist. Implementation raises practical questions, and we recommend a pragmatic approach that capitalizes on efficiencies while acknowledging the unique requirements of each directive.

Key Similarities and Differences of CSRD and CSDDD

Five Questions for A Coherent Approach to Complying with CSRD and CSDDD 

As we work to help companies comply with these regulatory requirements, five considerations stand out:

1) How and when should companies identify actual and potential adverse impacts on people and the environment? 

The first step for companies in addressing and disclosing their impacts on people and the environment is identifying them. CSRD and associated guidance clarify that the materiality assessment of negative impacts is informed by the due diligence process defined in the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises. Due diligence can help a company identify impacts and affected stakeholders, whose perspectives should inform the materiality assessment of impacts.

The OECD Guidelines and UNGPs, which also form the foundation of CSDDD, call for meaningfully assessing actual and potential impacts at various levels of the business, across operational contexts, and throughout the value chain on an ongoing basis (e.g. in supplier management systems). This iterative approach to assessment expects companies to progressively deepen their understanding of their most severe and likely impacts for management and disclosure and provides increasingly granular input for regularly updated double materiality assessments required by CSRD. 

In practice, efforts to identify impacts as part of due diligence and as part of materiality exercises can overlap. For example, nascent due diligence processes may start with a corporate-level scan of likely impacts based on industry, geography, and business model. This resembles the high-level view of likely impacts developed as part of a materiality assessment. These processes often include conversations with a similar set of internal and external stakeholders.

As a result, practical questions may arise as to how to integrate and sequence these high-level assessments, noting that human rights and environmental assessments generally go further than impact identification and evaluation, and include an assessment of the measures taken to address these impacts.  Teams can benefit from a consistent approach that reflects a unified understanding of the value chain and stakeholder landscape and ensures efficient use of the information gathered.

2) How should companies prioritize impacts for action and reporting? 

CSRD and CSDDD adopt the same criteria—severity and likelihood—for prioritizing impacts, though the aim of the prioritization exercise is different: determining topics for disclosure under CSRD versus sequencing actions to address impacts under CSDDD. Companies will need to determine how best to understand the severity and likelihood in service of both objectives across a diverse range of topics. While prior corporate efforts to align with the UNGPs and OECD Guidelines provide experience in applying these criteria to human rights impacts, this approach is new for environmental teams, and it is less clear how criteria should be applied to these topics. Companies also need to determine how to consistently understand inherent (gross) and residual (net) impacts, the former being the basis for prioritizing action and disclosure on adverse impacts under CSDDD and CSRD. The assessment criteria will need to be harmonized across the organization to prevent inconsistencies in communication and action. 

The lack of data on a particular topic does not mean that an impact does not exist or is not severe, particularly if the means to collect the data are lacking. Where impacts are unclear, a risk-based methodology—that seeks to assess the likelihood and severity of impacts using proxy data and/or expert judgment—should be used to inform the company’s approach. 

3) Why and how should companies engage affected stakeholders?

CSRD and CSDDD stress the need to consider the perspectives of affected stakeholders (e.g., people impacted by the business, environmental defenders) and to communicate to them how impacts relevant to them are managed. While CSRD does not require stakeholder engagement, CSDDD requires—and provides criteria for—meaningful engagement. This includes providing stakeholders with relevant and comprehensive information, ensuring ongoing consultation, considering barriers to engagement, and ensuring stakeholders are free from retaliation and retribution.

Engagement can range from formal channels (e.g., consultations, interviews, surveys, and grievance mechanisms) to informal day-to-day interactions (e.g., regular meetings with customers, town halls, or community roundtables). Companies should also engage stakeholders through their legitimate representatives (e.g., trade unions or civil society organizations) and ensure engagements are tailored for specific groups. For instance, where Indigenous Peoples may be impacted, engagement may involve good faith processes of free, prior, and informed consent. 

An effective stakeholder engagement approach should build trust and avoid the need for duplicative information gathering. Engagement with affected stakeholders should be integrated at each step of due diligence (as required by CSDDD), and insights from engagements should inform a company’s reporting (under CSRD), closing the due diligence lifecycle by accounting for its impact management to stakeholders.

4) How should companies address impacts? 

While CSRD does not require companies to act on material impacts, it does require them to report on how they manage impacts in some detail. CSDDD requires companies to act on impacts and provides a clear operational framework to help them understand what appropriate action looks like based on the company’s involvement in harm, such as ceasing this activity and providing remedy. It points to governance and management systems that should be deployed to prevent, mitigate, and remediate adverse impacts (e.g., policies, effective grievance mechanisms) as well as ways they should use leverage (e.g., supplier contracts, industry and multi-stakeholder initiatives). Recognizing the vast differences between companies, industries, operating contexts, and issues, CSDDD leaves flexibility for companies to tailor their actions to address impacts.

5) Who should be responsible for oversight and execution of sustainability due diligence, including reporting? 

Through CSRD and CSDDD, sustainability due diligence has become a legal responsibility for management and for board oversight with penalties for companies who fail to comply. Ensuring an effective response calls for clear governance structures, cross-organizational collaboration, and access to expertise. Boards may need to add members with relevant subject matter expertise or establish advisory bodies. Senior management should have formalized responsibilities and likewise draw on internal and external sustainability expertise to deepen their understanding of the company’s sustainability impacts and what good compliance looks like.

We hear from companies that new compliance pressure has the potential to become an overwhelming distraction. While this is understandable, our experience helping companies implement each step of due diligence and impact-based materiality reporting gives us hope that the regulatory baseline can become a springboard for ambitious yet pragmatic action on corporate impacts on people and the environment.

BSR’s multidisciplinary team takes a holistic approach to CSRD and CSDDD compliance strategies, helping companies to develop approaches that are aligned and integrated across the value chain. If you’d like further information, please don’t hesitate to reach out.

People

Katharina Doets

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Katharina works with the RISE partnership team to support and expand the network of RISE members and stakeholders.

She supports RISE members – brands, buyers, suppliers, and vendors in the apparel, footwear, and home textile industries– to promote gender equality and empower women workers throughout global supply chains.

Prior to BSR, Katharina managed strategic partnerships for the Center for International Media Assistance as assistant program officer at the National Endowment for Democracy in Washington D.C., focusing on the role of independent media in the creation and development of sustainable democracies.

Katharina holds an MA in Human Rights from University College London, as well as a BA in International Education and Development from the University of Sussex.

Katharina is a fluent English and Dutch speaker.

People

Saad Khan

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Saad Khan is an Associate on BSR's Financial Services and Climate Change teams.

He lives in New York and grew up in India. He was previously an Associate Director on the Investments team at the College Board, where he deployed the internal impact-venture fund focused on education and workforce development, in addition to performing M&A and portfolio management for the endowment. Before that, he was an Investment Analyst at Rida Capital, where he focused on financial inclusion and FinTech in India.

He holds a BS in Finance from Mercy College.

Blog | Wednesday June 12, 2024

What the SBTi Battle Portends: The Decisive Decade Becomes the Dilemma Decade

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The public battle over the direction of the Science Based Targets Initiative (SBTi) as it considers the role and integrity of carbon offsets and other market-based solutions is extremely important.

The dispute also has larger significance: it is also a proxy war reflecting the growing tension between slow and steady business progress on the one hand, and the need for more profound change based on what climate science tells us is needed on the other.

It is highly likely that this tension will grow in the years ahead. Almost halfway through the “decisive decade” during which it’s broadly recognized that the world needs to reduce emissions by 45 percent compared to a 2010 baseline, two undeniable realities are clashing.

First, companies, investors, governments and other key actors have made commitments and are working toward them, in ways that were unimaginable a decade ago. This is to be celebrated and advanced. 

At the same time, emissions are not only far off the Paris target, but they also remain above 2010 levels, and continue to increase, albeit by a slowing rate. 

The SBTi battle is unfolding amidst these two competing realities, as the debate between “pragmatism vs. ambition” intensifies. 

We should not be diverted by the breathless reporting on who said what to whom. The real question is more fundamental: how will we achieve the level of progress, that’s needed within existing structures and initiatives, to achieve the emissions reductions the science makes clear are a non-negotiable?

The dawn of the 2020s saw the explosion of commitments and collaborations, promising new efforts to make good on the vision of the Paris Agreement. A few years, one pandemic, a disrupted energy market, and multiple geopolitical conflicts later, the reality of what it will take to deliver on these goals is forcing hard decisions. 

In short, the decisive decade is in some ways becoming the dilemma decade, as companies come to grips with significant tradeoffs arising from new developments and perspectives. 

Reporting and Disclosure: The rise of CSRD and other mandatory reporting requirements is producing more transparency, enabling the allocation of capital to the most sustainable companies, and ideally, comparability in reviewing companies’ relative performance. These new requirements are also diverting time and money away from performance towards measurement, creating disincentives for companies to make ambitious commitments, and putting pressure on “social” issues where verification is more challenging.

Scope 3: On a related front, the need to address and report on Scope 3 emissions is clear: that’s where most of large companies’ emissions are. Many companies have made ambitious Scope 3 commitments as part of their net-zero strategies. Making good on these commitments, however, depends on forces that are sometimes out of the control of the companies making them. Slow progress towards a cleaner energy system in Southeast Asia, amongst other regions, long timelines for decarbonizing hard to abate sectors, and supply chains that often fail to create supplier incentives to decarbonize all mean that progress on Scope 3 is halting at best.

Unknown Unknowns: The iconic—some would say notorious—formulation by former US Defense Secretary Donald Rumsfeld comes to mind as well when considering dilemmas. The rise of generative AI has sparked energy hungry and emissions producing data centers that have laid waste to some companies’ climate targets. Can AI also deliver climate benefits? Absolutely, but the race to develop and deploy new technologies has sparked a problematic “emissions now, reductions later” mindset. 

In short, the tradeoffs reflected in the simmering debate within the SBTi are also found elsewhere. Their origin is actually quite simple: they reflect the non-linear nature of the energy transition, and the constant battle between pragmatists and those calling for all out ambition.

The tension between pragmatism and ambition will always be present. For the time being, the pragmatists appear to have more momentum on their side, not least as companies are adjusting to the environment where regulatory compliance plays a new role. The dilemmas companies face are real. We can handle a short pause to learn from these dilemmas, consolidate gains, and draw new lessons.

While that may seem rational in the immediate term, it is not sufficient to meet the challenge to make decisive, and rapid, progress.

The debate on how to reconcile the need for maximum mitigation with offsets with real integrity is important not only to the SBTi; it also represents a broader battle between ambition and pragmatism. We ultimately need both: without ambitious—and public—goals, progress will be insufficient. Without the hard work of translating the goals into action; they will be nothing more than words on a page. 

Blog | Wednesday June 12, 2024

Advancing a Just Transition: Lessons from Company Practices

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Sustainability teams face numerous internal hurdles when seeking to gain traction on advancing a just transition. Obstacles include breaking down internal silos, overcoming opposition and lack of knowledge, combatting resistance to incorporating just transition principles into policies and practices, and ensuring sufficient capacity and resources for implementation. 

The challenge to ensure a just, fair, and inclusive transition is intertwined with various agendas in environmental and social sustainability, including (but not limited to) reducing greenhouse gas emissions, adapting to climate change, protecting biodiversity, ensuring respect for human rights, and reducing inequality. Advancing a just transition requires bridging these efforts to cohesively prioritize people throughout the climate transition process.  

In our work with companies, BSR has observed that in many large, multinational companies, net-zero strategies are driven by teams of dedicated climate experts, sustainability efforts are spearheaded by sustainability program managers, and social risks and impacts are managed by social performance and human rights practitioners, with little engagement across silos. The fundamental challenge lies in aligning these distinct teams to collaborate effectively and work towards the common goal of achieving a just transition through a comprehensive, people-centric approach that harmonizes climate action, environmental protection, human rights considerations, and social equity measures. By fostering cross-functional collaboration and aligning objectives, companies can more easily address the multifaceted challenges posed by the energy transition. 

Practitioners often struggle to understand how to initiate just transition efforts, break down internal silos, get the right people engaged, and gain the internal buy-in needed to advance the agenda. Additionally, given recent regulatory changes, companies are focusing on the burdensome effort required to comply with mandatory compliance measures, which is leaving little bandwidth for other priorities. 

Working with companies to advance the just transition, we have seen that there is no one-size-fits-all approach to advancing the principles of a just transition within a business, as each company faces unique challenges and must tailor its strategy accordingly. We have, however, identified a few company actions that are successfully moving the agenda forward that may serve as inspiration or sources of learning for other practitioners working to advance just transition within their companies.  

Lessons Learned on How to Advance the Just Transition Inside a Company 

Secure an Executive Champion 

A strong executive champion who can drive the just transition agenda forward within a company has proven to be a critical success factor. Their support of just transition can complement other topics for which they are champions, such as human rights or climate justice. Companies with senior leaders, such as the CEO or a dedicated sustainability executive, that are champions of just transition are well-positioned to overcome internal resistance, resolve deadlocks, and create and maintain momentum for their just transition initiatives. Conversely, organizations that have lost executive-level champions or have yet to secure dedicated sponsorship risk stalling progress and facing challenges in gaining traction for their just transition efforts. This highlights the importance of cultivating leadership support and ensuring that the just transition imperative is firmly embedded within the organization's strategic priorities. 

Integrate Just Transition into Existing Strategies and Frameworks 

Many corporate climate transition plans fail to make a direct connection between human rights and the energy transition. Given this, some companies are exploring ways to incorporate just transition principles into their existing climate transition, net zero, energy transition, or broader sustainability strategies and frameworks.  

This integrated approach allows for just transition considerations to be woven into the fabric of the organization's overall sustainability efforts, rather than existing as a separate, siloed initiative. Companies are taking varying approaches, from developing standalone just transition strategies or position statements to integrating the principles across multiple policies and strategies. While a dedicated just transition strategy or position can provide a clear and focused commitment, integration into other strategies and frameworks has allowed some companies to align their just transition ambitions with the company’s existing efforts. A clear benefit of having just transition interwoven into other strategies is integrated communication with stakeholders (whether mandatory or voluntary).  

Once these necessary elements are in place, practitioners will be better positioned to engage in targeted communication and training to align diverse internal stakeholders and promote a more holistic understanding of how the company can support a just transition, both as a process and an outcome. As a result, many practitioners have made it their priority to target capacity building and awareness towards business lines and teams, who are on the front lines of implementing just transition efforts. 

Establish Formal and Informal Governance Mechanisms 

Embedding just transition into formal decision-making structures, such as cross-functional steering committees and working groups, can be an effective approach for driving the just transition agenda forward. These governance mechanisms bring together representatives from various functions, including sustainability, legal, procurement, human resources, and communications, fostering cross-functional alignment on just transition strategies and initiatives. However, while these formal governance structures bring together various internal functions, they typically lack regular representation from a company’s business lines. That is why, in addition to formal decision-making structures, less formal channels, such as working groups without decision-making authority, can play a useful role in building connections with and across business lines and encouraging broader discussions on just transition principles. These informal networks can help raise awareness, build understanding, gather diverse perspectives, and ensure buy-in, laying the groundwork for more formal governance processes over time. 

Leverage Successful Case Studies 

Showcasing successful own-company case studies and best practices related to just transition can be a powerful tool for building internal support and momentum. Real-world examples that demonstrate the positive impact of incorporating just transition principles – this includes but is not limited to early and transparent engagement with stakeholders, social dialogue with workers and unions, and responsible site decommissioning – can help illustrate the value and feasibility of these efforts. Companies that have leveraged compelling case studies have found success in securing additional company buy-in and have been able to drive the just transition agenda forward within their organizations. Case studies can be important in both demonstrating the business case but also offering clear insights and direction on what implementation can look like which can inform future company processes and expectations. 

Take Action 

Advancing a just transition is a challenge but one companies across sectors need to embrace. For resources on advancing a just transition visit the Just Transition Resource Platform and for guidance on planning for a just transition see BSR’s Just Transition Planning Toolkit. For support advancing the just transition within your company contact us.  

Blog | Wednesday June 5, 2024

How Companies Can Navigate China’s ESG Reporting Guidelines

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This year, China released its national ESG reporting guidelines to promote sustainable development and meet global standards. This coordinated effort, in line with China's economic goals, has significant implications for businesses operating in the country.

The national ESG disclosure guidelines mandate large companies included in domestic stock indexes as well as those listed overseas (including Hong Kong), to issue sustainability reports by 2026, representing 59% of China's stock market value. The guidelines attempt to align with international reporting standards such as the Global Reporting Initiative (GRI), the International Sustainability Standards Board (ISSB) and the Task Force on Climate-Related Financial Disclosures (TCFD). This facilitates clearer and more transparent communication of a company's ESG impacts, risks, and opportunities in a standardized manner that can be easily compared and benchmarked. They emphasize double materiality, and reporting across key areas such as governance, strategy, risk management, metrics and targets for disclosure. Additionally, they suggest reporting on China-specific topics, such as pollution and climate change, along with social issues like rural development to encourage sustainable growth.

In parallel, Beijing, Shanghai, and Suzhou have issued action plans focusing on ESG transparency and developing supporting infrastructure and governance to enable sustainable business practices. While Shanghai aims to ensure that all export-oriented state-owned enterprises listed on stock exchanges publish ESG reports by 2027, Beijing is emphasizing policy frameworks and establishing ESG rating systems. We anticipate more cities to follow.

Business Implications

The new ESG guidelines spur urgency among businesses to strengthen their ESG practices and governance, as failure to do so could result in heightened operational risks, loss of investor confidence, and diminished competitiveness in the Chinese market. By embracing these guidelines, businesses can enhance transparency while strategically aligning with China's sustainable development priorities.

We have identified four key steps to maximize your company's potential in this evolving landscape:

1. Balance Global ESG Integration with China Priorities: Rather than purely aligning with international norms, the new ESG guidelines anchor distinct national issues. On the one hand, companies need to align with global ESG benchmarks, particularly climate action and human rights, to facilitate seamless compliance and credibility. Given that their operations leave a significant impact on the local market and supply chain, companies will have to consider China's specific material issues such as environmental protection and common prosperity. Many multinationals are now engaging in initiatives to tackle income inequality, a key aspect of China's common prosperity agenda. As we anticipate more policy changes in these areas, companies need to adjust their strategies accordingly to remain compliant and contribute positively to local priorities.
2. Enhance Data Accuracy and Due Diligence: As the new guidelines mandate sustainability reporting for numerous firms, company ESG data will become more accessible via increased disclosures. There's a potential for heightened investor enthusiasm and engagement with business opportunities across various sectors within the country, due to more performance regulation and increased global investment within the country. However, robust due diligence is necessary to verify data quality and accuracy, especially for financial institutions evaluating investment opportunities. It will be necessary to implement advanced data verification technologies to ensure the accuracy and reliability of ESG data, such as blockchain-based systems or AI-powered data analytics tools.
3. Foster a Collaborative ESG Approach: As the new ESG guidelines take effect, China's overall ESG landscape will continue maturing. Amid this context, awareness among business partners like suppliers and industry partners will rise rapidly. By adopting a common regulatory approach to ESG, it could open China up to global cooperation regarding ESG issue areas like sourcing and value chains. Engaging local suppliers to collaboratively address scope 3 emissions, and working with local partners to ensure ESG data accuracy, alongside understanding and adapting to local regulations and market trends, will be increasingly crucial.
4. Anticipate Growing Sustainability Awareness and Expectations: As the ESG landscape develops further under the new guidelines, public understanding of ESG and sustainability issues will increase, especially in frontrunner cities like Beijing and Shanghai. Numerous innovations in business models and technology are already underway, focusing on areas such as carbon reduction and the circular economy. Companies should prepare for heightened consumer awareness, employee expectations regarding sustainability efforts, and scrutiny of their ESG commitments. This dynamic presents both challenges and opportunities, prompting companies to develop robust ESG strategies, governance structures, and reporting mechanisms to effectively engage with and meet market and internal expectations.

In summary, China's new ESG reporting guidelines and municipal-level guidance aim to advance sustainable business practices while aligning with international norms. For companies operating in China, adhering to these regulations is essential for mitigating risks, enhancing transparency, building stakeholder trust, and driving sustainable growth opportunities. By proactively integrating ESG across operations based on global and local ESG priorities, businesses can navigate this landscape more effectively.

For more insights into China’s evolving regulations landscape, please reach out to BSR’s local team.

Audio | Tuesday June 4, 2024

Responsible and Sustainable AI

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Lale Tekisalp, Associate Director, Technology Sectors, chats with David Stearns on the topic of Responsible and Sustainable AI, exploring:

• The latest developments, including the latest regulatory developments, that listeners should be aware of.
• The risks that companies should be aware of when designing, developing and deploying these models.
• What a responsible and sustainable approach to the development and deployment of AI would look like.
• Are there ways that AI can be used to help us (companies and society more broadly) achieve a more just and sustainable world?

Audio | Tuesday June 4, 2024

Regulating AI

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Richard Wingfield, Technology and Human Rights Director, chats with David Stearns on the topic of Regulating AI, exploring:

• What the newly passed EU AI Act is, and what it regulates.
• Why the Act takes a risk-based approach and how different types of risks are categorized.
• What type of advice BSR is offering to companies on steps they should be taking to come into compliance with the AI Act.

Audio | Tuesday June 4, 2024

The Human Rights Impacts of AI

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Hannah Darnton, Technology and Human Rights Director, chats with David Stearns on the Human Rights Impacts of AI, exploring:

• How the use of AI may impact human rights and where we might see examples of this.
• Are there ways that AI can be used as a tool to protect human rights?
• In BSR’s experience, are companies receptive to conducting human rights risk assessments of their AI practices?
• Recommended resources for companies looking to get started.

Audio | Tuesday June 4, 2024

Applying a Future Lens to AI

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Jacob Park, Transformation Director and head of BSR’s Sustainable Futures Lab, chats with David Stearns about Applying a Futures Lens to AI, exploring:

• Why futures thinking techniques can be particularly useful to discussions about responsible AI.
• How scenario planning exercises work, who is typically involved within a company, and how they might be applied to mitigate a potential outcome of AI such as worker displacement.
• Some of the opportunities and innovations offered by AI that have the potential to advance sustainable business.
• How futures thinking can help to address challenges emerging from the rapid advancement of AI.