9 Steps to Take Now to Get Ready for the CSRD

The European Council is expected to adopt the EU Corporate Sustainability Reporting Directive (CSRD) this month, November 2022. The CSRD is intended “to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules will ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe.”

Here are nine steps your company will need to take to prepare for the CSRD.

1.Determine whether the CSRD applies to you. The rules about what companies are covered are complex, so consult with legal counsel. In general, the CSRD will apply to all EU companies, including EU subsidiaries of non-EU companies, that exceed at least two of these thresholds:

• More than 250 employees
• Sales of more than €40 million
• Total assets of €20 million.

You can also check out the succinct summary on scope provided by K&L Gates in their June 2022 post.

If the CSRD will apply to your company, read on.

2. Stand up a CSRD compliance program. Companies will need new or updated codes of conduct and policies that tell employees what behaviors are expected of them. They will also need a complaints procedure for registering, investigating and resolving allegations of policy violations. These requirements are relatively easy to satisfy. They should fit within your existing compliance framework, and be an extension of them.

3. Find and prevent adverse impacts. Here is where the challenge really begins – understanding where there are adverse impacts on human rights or the environment inside your value chain. You will need to understand the extent of your value chain. You will also need to decide how to achieve the goal of the directive, which is to prevent adverse impacts.

4. Conduct due diligence. To prevent something you have to conduct due diligence, starting with supply-side inputs, and going all the way through the product life cycle to the use of the product, and its eventual disposition. Compiling a complete picture of the entire value chain will be a significant task for companies.

5. Map a prevention plan. Once you’ve done the diligence you will need a plan to prevent or mitigate negative impacts. This will require resources for developing actions plans, projects, and initiatives. It will also require engagement with the members of management, as well as the Board, which is ultimately responsible. 

6. Engage and inform your Board. The Board’s duties include overseeing the implementation of due diligence processes, integrating due diligence into corporate strategy, and taking into account the human rights, climate change and environmental consequences of their decisions.

7. Communicate internally. It takes time to communicate these requirements within an organization. It takes time to gain understanding and buy-in, and to ensure that, when you go to the Board for approval, you will get an easy yes, together with the funding you need for the compliance program to succeed.

8. Monitor performance. Once diligence processes and mitigation plans are in place, companies will also need to monitor their performance against their policies and plans. This will require them to develop new controls, monitoring procedures, calendars, and reporting conventions, and to devote sufficient internal or external resources to perform the audits.

9. Communicate externally. Finally, publicly communicating will require data collection, verification, and a cross-functional reporting process. This is something companies do already with their financial reporting, which will need to be expanded.

Is this systemic, value chain approach to due diligence worth it? The benefits for EU citizens, as well as individuals outside the EU, are clear. As stated by the EU, they include better protection of human rights, a healthier environment, greater transparency, and better access to justice for victims of adverse impacts.

On the company side of the ledger, companies get a harmonized legal framework in the EU, legal certainty and a level playing field. They can also use the CSRD to amplify customer and supply chain trust, and attractiveness to employees and investors, and for better risk management. 

If legal counsel advises you that you will need to comply with the CSRD, reach out to Clear Strategy Co. to get started.

© 2022 Clear Strategy Co.