Audio | Tuesday October 1, 2024

Reflections from Climate Week NYC: The Tension Between Pragmatism and Ambition

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Immediately following Climate Week NYC, BSR President and CEO Aron Cramer chats with David Stearns about some of the inconvenient truths facing sustainability leaders going into this annual gathering, observations that gave him cause for optimism, and a look inside some of BSR’s events, including a debate over whether American political leadership is needed for advancing global climate action and shaping climate policies. Aron also highlights two new BSR publications featuring guidance for sustainability leaders on navigating these turbulent times, and new insights from over 30 Chief Sustainability Officers of BSR member companies.

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Coudy Wane

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Coudy supports BSR’s Financial Services team on topics of ESG and sustainable finance. She works with member companies primarily in private markets.

Prior to joining BSR, Coudy has worked as an ESG & Impact Analyst at a private equity fund where she focused on impact investing opportunities in the African continent. She conducted ESG risk analysis, regulatory extra-financial reporting and supported SMEs in implementing baseline sustainability measures. Coudy has also intervened as a sustainability strategy consultant for various start-ups and international organizations across multiple sectors, notably tech, infrastructure and energy.

Coudy received her MSc in International Sustainability Management from ESCP Business School and speaks fluent English and French, and intermediate Spanish.

Blog | Tuesday September 24, 2024

Is Your Company Ready for TNFD?

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Nature disclosure has become the new norm for companies, due to both regulation and stakeholder pressure. Mandatory disclosure is now here, with companies around the world subject to the Corporate Sustainability Reporting Directive (CSRD) and its nature-related disclosures: ESRS E4-Biodiversity and Ecosystems, E3-Water and Marine Resources, E5-Resource Use and Circular Economy, and E2-Pollution. The EU’s Corporate Sustainability Due Diligence Directive (CSDDD) will also require companies to assess their impacts to the environment throughout the value chain. 

At the same time, investors and stakeholders are increasingly expecting companies to disclose their nature-related impacts and risks. The new norm of corporate nature disclosure reflects the growing recognition of the financial and operational risks nature loss poses to companies and their supply chains, as well as companies’ roles in impacting and remediating impacts to biodiversity and ecosystems.

The Taskforce on Nature-Related Financial Disclosures (TNFD) is the principal framework for voluntary nature-related disclosure, representing a new pathway for companies and financial institutions to act on nature loss. TNFD is closely aligned with CSRD, and the TNFD LEAP approach—Locate, Evaluate, Assess, Prepare—supports companies in assessing their nature-related impacts, dependencies, risks and opportunities necessary for disclosing under both frameworks. Indeed, TNFD and LEAP are expressly mentioned throughout CSRD, so they represent a useful framework to support companies’ mandatory and voluntary disclosure.

Market trends suggest that TNFD uptake will mirror that of its climate cousin, the Task Force on Climate-Related Financial Disclosures (TCFD), but at a more rapid pace. More than 320 companies have already committed as “early adopters” to disclose under TNFD in the next two years, representing listed companies based in 46 developed and emerging economies. Nearly a third of early adopters (100 of the total 320) are financial institutions, including asset owners and managers, collectively representing US$14 trillion in assets under management.

While reporting on nature-related impacts, dependencies, risks, and opportunities may seem daunting, companies already have some data available to report. Companies already reporting under TCFD likely have or could easily incorporate nature into existing processes and data.

Limited data is not an excuse for inaction, since similar to the TCFD, the majority of the recommended disclosures focus on process descriptions that do not require quantitative metrics to start reporting. Indeed, many companies already have a significant amount of existing data available (e.g., ERM, nature-related policies, substances of concern procedures, secondary data sources such as LCA and climate data, etc.) to disclose under TNFD, so conducting a gap assessment can be a good first step in understanding your readiness to disclose and where further action is needed.

To support our members in disclosing under TNFD, BSR provides a TNFD Readiness Check service to assess if a company is prepared. Key steps include:

1. Holding a TNFD learning session with relevant employees to establish a strong foundation for the assessment. The session provides an overview of how TNFD fits into the broader reporting landscape, including CSRD, Global Reporting Initiative (GRI), and Carbon Disclosure Project (CDP).
2. Conducting a peer benchmark—specific to TNFD—to understand industry norms and trends, best practices, and insight into market positioning. 
3. Carrying out a gap assessment of company data against TNFD reporting requirements and summarizing both promising starting points and remaining gaps.
4. Based on the results of the benchmark and gap assessment, developing strategic and tactical recommendations for approaching TNFD.

Overall, our support seeks to ensure companies have a solid understanding of TNFD and how it fits into the broader disclosure landscape, clarity on their readiness to disclose and the actions needed to close gaps, as well as overall insights on their priority actions and positioning within the market. While we also support companies on CSRD reporting, BSR’s TNFD support provides a rapid and nature-focused assessment of existing data to support companies on their nature journeys.

Please contact our Nature team to find out more and discuss how we might support your company’s TNFD disclosure. While what we share here outlines our standard approach, we are pleased to customize our approach to best fit your company’s needs, timeline, and budget.

Blog | Monday September 23, 2024

CSDDD: A De Facto Climate Due Diligence Law That Safeguards People

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The EU Corporate Sustainability Due Diligence Directive (CSDDD)’s Climate Transition Plan (CTP) requirement has three major implications for climate action:

1. Delivering climate transition plans, including science-based targets covering Scope 1, 2, and 3 across the full value chain, are now a legal obligation.
2. Climate transition plans are evolving from being seen merely as a reporting tool to a key strategic approach. The CSDDD requires companies to determine whether their business model and strategy are compatible with the 1.5°C goal of the Paris Agreement—taking corrective action if they are not.
3. Climate transition plans should be grounded in respect for human rights to ensure climate actions are sustainable, just, and equitable. By requiring companies to conduct human rights due diligence on their negative impacts, CSDDD brings the just transition in scope—with potential litigation risks for non-compliance.

Climate Week NYC is upon us. Sustainability professionals are gathering in New York City for arguably the most important milestone in the climate agenda this year. With the climate crisis dangerously nearing tipping points, and this year marking halfway through the “decisive decade,” the CSDDD offers an opportunity to advance transformational climate action centered on just transition principles.

After years of negotiation, the EU’s CSDDD entered into force in July 2024. Arguably the EU’s most ambitious sustainability measure, companies in scope must adopt and implement Climate Transition Plans (CTPs) and conduct due diligence to assess and manage their negative human rights and environmental impacts.

Regulating Climate Action for Business

While governments have advanced a range of climate-related regulations, these measures have focused on disclosure, not action. CSDDD makes delivering the Paris Agreement a regulated affair for business—and that’s a big deal.

According to the CSDDD, companies must “adopt and put into effect a climate mitigation transition plan that aims to ensure, through best efforts, that their business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement.” This includes time-bound targets for 2030 and five-year steps up to 2050, including absolute targets for scopes 1, 2, and 3 (covering full value chain, unlike CSDDD’s other due diligence requirements).

CSDDD establishes CTPs as a strategy tool. It makes clear that reaching Paris Agreement goals requires companies to transform their business models, which includes addressing tensions between their growth and sustainability.

Advancing Climate Due Diligence

The CSDDD is grounded in global due diligence standards. The OECD Guidelines expect companies to conduct climate due diligence to assess and manage the adverse climate impacts they generate and to conduct human rights and environmental due diligence to address the negative impacts of their operations and value chains, including their climate activities, on people and nature.

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Voluntary frameworks on climate action have long directed companies to align with steps of climate due diligence, such as identifying, mitigating, and communicating climate impacts. For instance, companies following Greenhouse Gas (GHG) Protocol, Science Based Targets Initiative (SBTi), Task Force on Climate-Related Financial Disclosures (TCFD) governance-related guidance, Carbon Disclosure Project (CDP) disclosure expectations, or frameworks such as Transition Plan Taskforce, are ahead on their CSDDD CTP-related compliance journey.

While CSDDD doesn’t require companies to assess their impacts on climate, companies must know their emissions to adopt and implement credible, CSDDD-aligned CTPs.

CSDDD is Closing the Just Transition Gap

Climate action is urgent, but it must be just and inclusive. Few climate transition frameworks (e.g., Glasgow Financial Alliance for Net Zero, or GFANZ, UK’s Transition Plan Taskforce) ask companies to assess the impacts of climate action on people—and none ask companies to address them. This perpetuates siloes between climate and human rights teams within companies.

At first glance, the CSDDD’s CTP requirements reflect a siloed approach. There is no explicit requirement to consider the actual or potential negative impacts of climate mitigation on people. CSDDD also doesn’t explicitly require companies to focus on adaptation—which is a miss. Yet by requiring companies to conduct human rights due diligence on the negative impacts of their operations, supply chains, and limited downstream partners, the just transition is in scope.

Respecting human rights in climate action involves committing to respect human rights in the transition out of fossil fuels and into a green economy. Companies must expand human rights due diligence to cover CTP measures, such as decommissioning mining sites, switching to renewables, and protecting carbon sinks, and enable remedy when harms occur.

Engagement of affected stakeholders, such as workers, trade unions, communities, and Indigenous Peoples, is required. This may take the form of tripartite dialogue with trade unions and government or engaging in good faith processes of free, prior, and informed consent. At all times, companies must provide comprehensive information about climate mitigation plans and activities that may affect people’s lives and ensure ongoing consultation while reducing engagement barriers and ensuring people are free from retaliation.

Companies that fail to comply with CSDDD’s due diligence requirements may be held civilly liable for any resulting damages to people. This comes amidst the rise of just transition litigation—affecting companies that extract and produce materials critical for the transition, as well as wind energy, hydropower, and solar projects—a trend that is certain to continue.

CSDDD Preparation: Putting Just Transition at the Heart of Climate Action

Few companies have conducted human rights due diligence of CTPs despite growing attention to just transition in GFANZ, the Transition Plan Taskforce (TPT), and the Corporate Sustainability Reporting Directive (CSRD). The following recommendations support an ambitious approach to preparing for CSDDD:

1. Assess gaps in CTP mitigation measures and associated climate and human rights due diligence approaches against CSDDD requirements. Review business models to ensure compatibility with Paris Agreement goals and respect for human rights.
2. Assess alignment of overall climate strategy with the OECD Guidelines and the UN Guiding Principles to strengthen a holistic approach to human rights and climate change. Ensure the climate approach focuses not only on mitigation, but on  adaptation and climate justice.
3. Engage and strengthen board and senior leadership capacity. Strong leadership is needed to set the tone and ensure the company leans into the complexities associated with adapting business models, evaluating trade-offs, and ensuring net-zero efforts are grounded in human rights due diligence.
4. Build internal expertise and foster cross-functional collaboration between human rights and climate teams, including when conducting due diligence and designing strategies and action plans.
5. Develop an affected stakeholder engagement strategy, including stakeholder mapping to identify all groups relevant to each mitigation activity, such as climate-vulnerable stakeholders. Create an engagement timeline that starts earlier than traditional project cycles and design culturally appropriate engagement methods for each group.
6. Identify and scrutinize collective action platforms that support climate mitigation efforts. Use leverage within initiatives to promote the inclusion of human rights and just transition approaches in the transition to a Paris-Agreement aligned economy.

BSR will discuss the connection between environmental and human rights due diligence this week at Climate Week NYC.

Interested in advancing your company's Climate and Human Rights Due Diligence Strategies? Contact BSR’s Human Rights and Climate experts to find out more.

Blog | Friday September 20, 2024

Addressing the Conflict Between Growth and Sustainability: Q&A with Jo Swinson

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Ahead of Climate Week NY, Jo Swinson, Director at Partners for a New Economy (P4NE), discusses the tension between traditional growth models and sustainability goals and how businesses can work together to explore new ways of measuring economic success.

Can you introduce yourself, and tell us how your background as a political leader informed your decision to lead Partners for a New Economy?

Since the earliest days of my political career, I have been convinced of the need for alternative measures of economic success. Back in 2006, I explored the flaws of GDP growth as an indicator of quality of life, and in 2009, I co-founded the UK Parliament’s cross-party group on Well-Being Economics. This idea wasn’t new—as far back as 1968, Robert F. Kennedy memorably noted: “It [GDP] measures everything in short, except that which makes life worthwhile.”

Later, I saw that the disconnect between the promise of economic prosperity and the precarity of people’s lives can lead to resentment of the current system. The ensuing backlash has torn at the fabric of our society and undermined faith in our democracy.

In 2020, I was looking for a new challenge. Combining my political experience with my long-standing desire to change economics, leading P4NE was a perfect match. The goal of an economy that serves people and the rest of nature is ambitious, but possible.

Growth is the foundation of our current economic system. How does our economy need to transform for humanity to thrive in the long term?

We’re primed to think of growth as a good thing—it’s deeply embedded in our economics and culture. As a society, we need to support the growth of many things—living standards and food security, health and well-being, the skills and creativity of our people, access to nature and green spaces.

For humanity to thrive, we need to understand and measure not just the quantity of growth, but also the quality of that growth: Is it in the sectors, regions, and countries where the growth is needed? What environmental risks is it driving or mitigating? How are the benefits being shared, both within our societies now and with future generations?

The World Economic Forum Global Risks Report (2024) cited the top risks over the coming 10 years as all being environmental: from extreme weather events to natural resource shortages.

We are biological creatures, and we depend on earth’s life-giving processes. We cannot survive without a thriving natural world: an economic system that destroys it is doomed to fail.

What we measure determines what gets done. Business knows this—it’s why KPIs exist.

We need a regenerative economic system where our success metrics include planetary health, equity and the well-being of all people, now and in the future.

In BSR’s recent report, The Elephant in the Sustainability Room, we explore the tension between growth and sustainability targets. Why is this topic so important for business right now?

We know business leaders are wrestling with this question. The competing demands of a science-based approach to sustainability and shareholder expectations of an exponential growth model create a genuine, systemic tension.

We know it’s hard. Business leaders are operating within the constraints of the current system, while looking ahead to a future that will inevitably be very different. We know from recent experience with the pandemic how rapidly so many aspects of the economy can be upended. That gives some insight into a future world of "polycrisis," with all the uncertainty that will bring.

The Institute and Faculty of Actuaries 2023 report The Emperor’s New Climate Scenarios said we could expect 50 percent of GDP destruction by between 2070 and 2090, given current rates of climate change. That’s a massive disruption, a huge loss of value, that will shape the coming decades. This is why this topic is so important now. Business needs to be ready to be part of the solution.

We often hear about regulatory and legal barriers to companies exploring alternative business models. What concrete actions can business take given these constraints? Are there different implications for companies in different sectors?

Business is increasingly scrutinizing its role in protecting our planet and the need to make a net-positive contribution to people’s well-being. There are many tools available across all sectors to build such practices: Climate Scenario Analysis with BSR, international standards of best practice from B Corp, and Doughnut Economics Lab’s Business Tools, to name a few.

Where there are legal or regulatory barriers, one of the most important things business can do is to advocate for change. When I was a UK Business Minister, it was so much easier to build the political momentum for legal changes—on corporate transparency on emissions, or stronger protections for vulnerable workers—when business voices were speaking out in support.

The key question is what does a successful business of the future look like? Anticipating a more volatile world with ecological crises now baked in, businesses need to think about whether their purpose, business models, governance and ownership structures are fit for the future. An example of a business with a future-focused purpose is Natura & Co, who have put their "Commitment to Life" at the heart of every aspect of their business targets. On governance, Faith in Nature have innovated by giving nature a seat on the board.

Much of the work being funded in this field is supporting economists, academics, and activists. What would you say to your peers in philanthropy about the need to mobilize the business sector to move “Beyond Growth?” What more can philanthropy do to galvanize bold action from companies?

To mobilize, we need to build understanding. Whilst everyone’s stake in the future is clear, even the words "beyond growth" can be divisive and misunderstood.

At the moment, it’s the most forward-looking companies and philanthropists who are taking the lead. Patagonia’s 2022 announcement that "Earth is now our only shareholder" signaled a reimagining of their corporate structure. Still unapologetically for-profit, they give 98 percent of those profits to The Holdfast Collective—a philanthropic nonprofit dedicated to defending nature.

Of course, no single business or person has all the answers. Philanthropy can create space for business to engage with going "beyond growth," to show leadership, and be celebrated for that. We need business to work with investors to shape a truly sustainable future, and we need legislative and regulatory changes to support and encourage the business sector in their collective efforts.

BSR works with its network of 300 members, as well as civil society, philanthropy, and government to advance bold, meaningful action on key sustainability issues at a systematic level. To explore this topic in greater detail, join BSR and Forum For the Future during New York Climate Week, where we will be hosting a dialogue between business and philanthropy on “Addressing the Conflict Between Growth and Sustainability.”

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Jo Swinson

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Reports | Thursday September 19, 2024

Between Two Worlds: Sustainable Business in the Turbulent Transition

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Between Two Worlds: Sustainable Business in the Turbulent Transition reflects on a report BSR published in 2018, Doing Business in 2030, which explored how sustainable business might change over the decade to follow through four alternate scenarios.

Almost halfway through the ensuing decisive decade, now is an opportune moment to reflect on the new developments in the world since our original report, how trends have matured, and new shocks have emerged to shape the context for sustainable businesses. Between Two Worlds: Sustainable Business in the Turbulent Transition offers insights on these changes and how to prepare for what lies ahead.

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Blog | Wednesday September 18, 2024

Climate Week NYC: A New Set of Inconvenient Truths for Sustainable Business

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Climate Week and the United Nations General Assembly gathering in New York City—typically a time of optimism and promising announcements from a community of people committed to putting the world on a path to justice and sustainability—arrive in 2024 with a decidedly turbulent backdrop.

Unfortunately, this year is no time for optimism. Rather, it’s a moment of reckoning, a time to recommit to progress, and an opportunity to regain ownership of the narrative about why sustainability is the best and indeed only path forward. And, crucially, it’s time to sit down and have the hard conversations about the lack of progress from even the most committed companies.

To start, let us acknowledge that business action is achieving some impact. New technologies, partnerships, investments, and commitments are making a real difference, and we need more of it. 

The problem is, this doesn’t make enough of a difference, and as Climate Week looms, there are reasons for concern in the global effort to mitigate and address the impacts of climate change.

Progress, and change, are hard! Many companies have learned that achieving their 2030 climate goals is challenging, with a changing economy, growth that brings higher emissions, complex supply chains that make Scope 3 emissions reductions difficult, and policy uncertainties and inconsistencies. Even where intentions are clear and strong, progress is falling short.

Political opposition to achieving a more sustainable economy, often well-funded but ill-considered, if not outright dishonest, is having an impact. The recent news that a new US$1 billion fund is being dedicated to reversing business efforts on climate, diversity, and other issues is just the latest example. Many companies concede privately—and some publicly—that they are walking back prior commitments in the face of these challenges.

The new regulatory environment has produced a level of caution inside business that is, overall, inconsistent with the purpose of the new compliance requirements. Companies are spending too much time focused on verifying past performance to address reporting rules, as opposed to investing in a more sustainable future.

And, many business leaders never bought in fully to the rising tide of action on climate, equity, and purpose, and they have gladly taken the off-ramp from a sustainable future at the first sign of economic, political, or other challenges.

But here’s the thing: we do not have the luxury of slowing down.

I’ve never been one to think that shouting louder and more often about the importance of just and sustainable business achieves very much.

But I do believe that speaking more honestly, and addressing the real barriers, in a real way, is precisely what we need.

Al Gore changed the way we think about climate change with his seminal movie, An Inconvenient Truth. That movie premiered almost two decades ago, in 2006. The original inconvenient truth truly catalyzed a new way of thinking about the existential stakes of climate change. 

Today, there is a new set of inconvenient truths—not only on climate, but also on human rights, nature, equity, and the foundational question of democracy and rule of law—that must be understood and addressed if we are to successfully act to make good on the myriad promises and targets.

First, the underlying conditions prompting attention to climate, biodiversity loss, and diversity are accelerating, not declining. The planet is heating, species are in decline, and we are breaching planetary boundaries. On diversity, Western societies are growing more diverse, every minute of every day. If it is true that we are creating societal, economic, and environmental risk through unchecked climate change and nature loss, and in a more positive way, seeing our societies grow ever more diverse, it is only rational to respond with heightened business attention to the profound changes: denial is not a winning strategy.

Second, faith in markets and global trade has plummeted and is driven by the fact that for many, they represent risk and vulnerability, not human progress. This dynamic is reinforced by the pace of technological change: advances that delight us also create fear of human displacement. If the average person cannot see themselves thriving in the future—and many don’t—then faith in markets and business will not be where it needs to be for either business or society to thrive. Business can ill afford to avoid this fact and should reckon with the reasons why rising generations demonstrate falling support for the market economy.

Third, and related, healthy societies require healthy governance, and the democratic decline is real, global, and spreading. Businesses cannot assume that they will be able to operate successfully, fairly, or freely in a world where civic space is closing, where rule of law is applied unevenly, and where political divisions fester and grow. Business walks away from civic engagement at its peril—and ours.

Finally, it is also true that “greening” our existing models won’t get the job done in the face of the reality that unbridled growth and resource consumption simply be sustained. This means the inconvenient truth that existing models are not—literally—sustainable. In the best case, it means that the opportunity for innovation, delivering value in new ways, is greater than ever. 

The solution here is not simply to care more, say more, or necessarily spend more.

These inconvenient truths mean that companies have both a responsibility, and an opportunity, to face the fact that the very foundations on which they rely—societies based on strong institutions, broad-based faith in the future, and resilient business and economic models—exist, but are under significant duress. No company can thrive if these framework conditions fail.

At this year’s Climate Week, then, though there are many good things to champion and celebrate, we would be wise to avoid the temptation to embrace a false sense of progress. It’s critical that we approach this year’s NYC gatherings with a laser focus on the challenges, risks, and opportunities that lay before us.

This year, it behooves all of us to reappraise our approaches, to rededicate ourselves to making the change that is needed, to have confidence in the fundamental principles on which we’re basing our decisions, and to transcend the challenges ahead.

Blog | Wednesday September 11, 2024

The Impact of Mandatory Sustainability Reporting on Corporate Functions

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As businesses worldwide adapt to new sustainability reporting requirements, the landscape of corporate governance is shifting. The introduction of the EU Corporate Sustainability Reporting Directive (CSRD), European Sustainability Reporting Standards (ESRS), the International Financial Reporting Standards (IFRS) Foundation’s inaugural Sustainability Disclosure Standards, and the US Securities and Exchange Commission (SEC) climate disclosure rule represents a significant evolution in how companies are expected to report on their sustainability efforts. 

This BSR policy brief explores the implications of these regulatory changes on various corporate functions. By synthesizing insights from companies from a range of sectors navigating this new terrain, the brief provides a comprehensive overview of how these requirements affect different functions and offers actionable recommendations for adaptation. 

Below is a high-level glimpse into the impact on key corporate functions, with many more insights detailed in the full brief: 

• Sustainability: Sustainability teams need to establish cross-functional committees and work closely with other departments to advise executive leadership and integrate financial and sustainability reporting. 
• C-suite: Senior executives must build accountability for sustainability by aligning executive compensation with sustainability metrics, upskilling themselves on material sustainability issues, and staying informed on ongoing efforts. 
• Board of Directors: Boards of Directors are required to sign-off on materiality and reporting, which requires enhanced oversight, updated governance structures, and expanded knowledge of sustainability topics.
• Finance: Finance departments must hold sustainability data to the same level of rigor as financial data, align reporting timelines and ensure data accuracy. 
• Audit: Audit functions need to establish robust controls for sustainability data collection and verification, ensuring consistency and reliability. 
• Risk: Risk management teams must incorporate ESG risks into their frameworks, in order to provide a comprehensive view that includes emerging sustainability issues. 
• Legal/Compliance: Legal teams must stay abreast of new obligations, assess the scope of reporting requirements, and ensure compliance with various regulations. 
• Procurement/Supply Chain: Procurement must assess and disclose impacts across the value chain, requiring increased transparency from vendors and improved supply chain due diligence. 
• Human Resources/Diversity, Equity, and Inclusion: These teams must align regional and global reporting requirements, especially concerning employee data and diversity metrics. 
• Marketing/Communications: Marketing and communications need to align sustainability narratives with those of regulated filings, ensuring consistency across all public communications and reports. 
• IT/Cyber: IT departments must support both finance and sustainability teams, as well as other functions, by improving systems to collect data and disclosures.

How to use the brief:

• Use the recommendations provided as a starting point for navigating the complex landscape of mandatory sustainability reporting. Consider the extent to which the current state that we outline for each function applies to you and your company. 
• Get familiar with the concept of cross-functional collaboration to address new reporting requirements. The brief is organized by function to ensure that each department has visibility into a critical role it plays in achieving compliance and advancing the company’s sustainability goals. However, we also advise looking across the sections to understand where and how joint efforts can ensure efficiency while reinforcing each other. 
• Share these insights with colleagues across different functions and engage in discussions to explore how you can support one another in preparing for the upcoming reporting requirements. 
• Use it to help us help you! If you have follow-up questions or require tailored support in a particular area, BSR has developed a range of service offerings that support companies on their sustainability and compliance journeys. 

Companies interested in discussing the topic further are welcome and encouraged to join the Future of Reporting initiative, which has been closely tracking regulatory developments.

Blog | Wednesday September 4, 2024

The CSDDD: Implications for the Finance Industry

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In July 2024, the WBA’s Social Benchmark evaluated the world’s 2,000 most influential companies and found that approximately 90% of financial institutions assessed scored zero on human rights due diligence. This follows the 2022 WBA Financial Systems Benchmark findings that 80% of financial institutions did not acknowledge their impacts on the environment or society. 

Despite the progress we have seen in the industry at BSR, these figures are sobering. They highlight the importance of mandatory measures that foster responsible finance industry conduct to drive the transition to a more just and sustainable green economy.

Inclusion of the finance industry in CSDDD was the subject of intense debate throughout the negotiation process and proved to be a major sticking point among EU governments. Despite intense lobbying, the finance industry is in scope of CSDDD, with downstream due diligence out of scope.

Adopted in May 2024, the CSDDD is the EU’s most ambitious attempt to reshape business practices in support of sustainability. It is grounded on globally agreed due diligence standards—the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights (UNGPs). It requires some 6,000 EU companies and 900 non-EU companies to conduct risk-based due diligence on their human rights and environmental impacts. This includes managing climate impacts through the adoption of climate transition plans covering scopes 1, 2, and 3 emissions. Companies may be held civilly liable for damages for failing to comply with the law. 

Unpacking the Implications for the Finance Industry 

Starting as early as 2027, “regulated financial undertakings” that operate or generate income in the EU and meet the relevant EUR€450 million and employee thresholds must conduct due diligence to assess, manage, and report on the actual and potential negative impacts of their operations, subsidiaries, and supply chains on human rights and the environment. Companies in scope include investment firms, alternative investment fund managers, insurance companies, credit institutions, central securities depositories, financial holding companies, and crypto companies. 

The CSDDD requires shifting attention away from purely financial risks to the risks that business poses to people and the environment. It involves investing time and resources to embed concern for—and transparency on—human rights and environmental impacts into business cultures and creating channels for affected stakeholders to report harm. Where prioritizing action may be necessary, the most severe and likely impacts must be prioritized first.

In practice, banks, asset managers, and others must know and show that they manage the impacts of their operations on their workforce, on the individuals they serve, and on the environment. Key risks include paying some workers below the living wage, engaging in predatory lending to at-risk communities, or failing to prevent environmental harms of crypto-assets. 

It also requires addressing supply chain impacts—ranging from privacy breaches and labor impacts associated with data management providers to office equipment and hardware tainted with modern slavery—through an ongoing process of assessment, engagement, and monitoring. It requires using responsible contracts and may involve providing support to small and medium-sized enterprises and collaborating with peers to address root-cause issues. While the CSDDD only applies to supply chain relationships, it recognizes the leverage tools available to the finance industry, such as shareholder resolutions and proxy voting, and expects them to consider these when seeking to influence direct and indirect business partners. 

Preparing for Downstream Due Diligence

While downstream exclusion is a sign of misalignment with the spirit of the CSDDD’s risk-based due diligence approach (as the greatest risks to people and planet in finance are found downstream), it is critical for financial institutions to incorporate this approach into their downstream activities and relationships.

The CSDDD requires the EU Commission to submit a report to the EU Council on the need for expanded downstream due diligence requirements for financial undertakings within two years of its adoption.

Given the regulatory regime in which the CSDDD resides, financial institutions should already be assessing and reporting on how they manage downstream impacts. The CSDDD is part of a trio of EU laws that create a framework for sustainability due diligence. Companies in scope of the Corporate Sustainability Reporting Directive are required to report on the material negative impacts of their downstream business partners, such as corporate clients and portfolio companies. CSRD guidance further clarifies that materiality assessments of negative impacts should be informed by the OECD Guidelines and UNGPs due diligence approach. Meanwhile, the Sustainable Finance Disclosure Regulation requires finance companies to report on the alignment of portfolio companies in ESG-labelled funds with the OECD Guidelines.

At BSR, we also see growing attention to downstream due diligence. We work with private equity firms, insurance companies, and pension funds to conduct pre-deal, site-level human right assessments and assess portfolio-level human rights impacts, including those related to environment and biodiversity. We also support companies to embed human rights throughout the investment lifecycle and develop effective grievance mechanisms to address harms across value chains. These companies are not only preparing for compliance; they recognize that these measures provide them with better data to inform business decisions and enable them to navigate emerging human rights and environmental issues more effectively.

The Journey of Finance Industry Alignment with the CSDDD and Beyond 

Financial institutions are encouraged to act by developing and implementing a due diligence approach that is grounded in the OECD Guidelines and the UNGPs. In June 2024, we published insights to help companies start on their journey to align with the CSDDD. While the journey may be different for each company, some key steps include assessing gaps in existing policies and management practices, upskilling and increasing collaboration across teams, mapping their value chains and identifying affected stakeholders, and establishing a roadmap for CSDDD alignment.

BSR takes a tailored and forward-looking approach to CSDDD compliance, helping finance companies develop strategies and processes to build their resilience and align with their sustainability goals. If you’d like further information, please reach out to us.