A corporate puzzle: navigating the CSRD and CSDDD (and the LkSG)
by Maxine Bichler
With all the new acronyms and regulations floating around these days, you may feel that you and your company are swimming in a sea of legal jargon. The Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), the German Supply Chain Due Diligence Law (LkSG)… it’s a lot to take in! But don’t worry – we’ve created this post to help break things down so you have a clearer understanding of what’s required.
We’ll guide you through an overview of the CSRD and the CSDDD, before zooming in on their similarities and differences. The good news is that you don’t necessarily need multiple, individual strategies to tackle these directives. At their core, they’re based on similar principles. By aligning your approach, and leveraging on the LkSG, you can meet the requirements of both directives without adding complexity.
What is the CSRD?
The Corporate Sustainability Reporting Directive (CSRD) is the EU’s updated framework for corporate sustainability reporting. It significantly expands on the previous Non-Financial Reporting Directive (NFRD), requiring companies to disclose detailed information on environmental, social and governance issues. The CSRD affects around 50,000 companies across the EU, covering their entire value chains, and aims to make sustainability reporting more transparent and comparable across the EU. A key feature of the CSRD is its emphasis on double materiality, which means that companies must assess not only how their business impacts the environment and society, but also how sustainability issues impact their business.
What is the CSDDD?
The Corporate Sustainability Due Diligence Directive (CSDDD) focuses specifically on human rights and environmental due diligence (HREDD). It requires companies to actively identify, prevent, mitigate and account for negative human rights and environmental impacts throughout their operations and supply chains. It also requires stakeholder engagement, grievance mechanisms and climate action plans to ensure compliance and promote long-term sustainability.
Check out our guide to the CSDDD here
How do the CSRD and the CSDDD compare?
At first glance, the CSRD and the CSDDD may seem to serve different purposes: one focuses on reporting, while the other emphasises due diligence. However, they complement each other and are based on common principles of sustainability, transparency and accountability.
- CSRD (focus on reporting): The CSRD is primarily about transparency. It requires companies to disclose comprehensive information on their sustainability practices, including environmental, social and governance (ESG) issues. Through the double materiality assessment, companies must evaluate both how sustainability issues affect them and how their operations affect the environment and society. Reporting under the CSRD includes identifying material ESG topics and implementing measures to manage associated risks and opportunities.
- CSDDD (focus on due diligence): By contrast, the CSDDD focuses on action, particularly in the area of HREDD. Companies are required to identify, mitigate and address negative impacts across their supply chains. Unlike the CSRD, which reports on actions, the CSDDD requires companies to implement due diligence processes, with specific measures such as stakeholder engagement, climate action plans and grievance mechanisms.
Despite these differences in focus, the two directives are aligned in their broader objectives. The CSRD incorporates key elements of the HREDD framework, such as the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights (UNGPs), which are foundational to the CSDDD. These overlaps become more apparent under the CSRD’s European Sustainability Reporting Standards (ESRS), where companies must identify material topics, take action to manage risks and impacts and monitor and report on their progress. This mirrors the CSDDD’s requirement for companies to establish and continuously improve due diligence processes.
In addition, both directives emphasise stakeholder engagement and grievance mechanisms. In the CSDDD, stakeholder engagement is mandatory, while in the CSRD it’s strongly recommended as part of the double materiality assessment. Both directives also require transparency on how companies handle complaints and grievances. Under the CSRD, companies must disclose the number of complaints received and their financial impact, reinforcing accountability – a central aspect of the CSDDD’s focus on responsible business conduct.
For companies in Germany: leveraging on the LkSG
German companies already complying with the LkSG have a head start in preparing for the CSDDD. The LkSG requires companies to publish annual reports on risk analyses and preventive measures relating to human rights and (some) environmental impacts in their supply chains. The CSDDD extends this by covering more companies and introducing more stringent due diligence requirements.
Similarly, companies can use their LkSG experience to meet the requirements of the CSRD.
Both the CSRD and the LkSG require transparent reporting, but the CSRD adds additional layers of disclosure, including KPIs, risk timeframes and stakeholder engagement. By integrating LkSG processes into their CSRD reporting, companies can more effectively address both directives and ensure they meet the broader EU requirements.
Leveraging synergies to develop a holistic approach – aligning strategies
Given the overlap between the CSRD, CSDDD, and LkSG, it’s clear that focusing on each directive separately is neither efficient nor practical. Companies need to take a holistic approach to compliance. The underlying goal of all these regulations is to ensure that companies carry out human rights and environmental due diligence, manage their impacts and report transparently on their progress.
The CSRD provides the framework for companies to measure the effectiveness of their actions and communicate these results to stakeholders. Meanwhile, the CSDDD ensures that due diligence processes are robust and actionable. By aligning strategies for both, companies can streamline compliance, reduce resource strain and ensure they are meeting both regulatory expectations and stakeholder demands.
