The European Union’s latest piece of sustainability legislation will provide investors with greater transparency into companies’ climate and human rights performance, giving them crucial information on which to make investment and risk decisions, according to a leading figure in the ESG data space.
The Corporate Sustainability Due Diligence Directive (CSDDD) will enable firms to present information on the key environmental and social risks they face and help investors identify which are a better bet, said Alexandra Mihailescu Cichon, chief commercial officer for RepRisk. The regulation will also go some way to reducing environmental and social harms, Mihailescu Cichon told ESG Insight.
“For us, as a data provider who is focused on due diligence and focused on risks, our whole raison d’etre is to support organisations with due diligence, with better risk management, so we’re excited to see this coming into play in the market,” she said. “It will really shift the dial when it comes to reducing the adverse impacts on the environment and on society.”
Final Text
The CSDDD, the final text of which was approved last week, will require companies to seek information on the climate and human rights implications of what they do and the activities of the suppliers they work with. While financial institutions will only be expected to report on their own performances, non-financial firms will be obliged to seek information and engagement throughout their value chains.
The regulation is expected to work in concert with another EU rule, the Corporate Sustainability Reporting Directive (CSRD), which came into force at the start of the year and puts responsibility on more than 50,000 companies to disclose a wealth of ESG data. Together, it’s anticipated that the rules will hold companies accountable for their impacts and help investors build a fuller picture of the firms and assets in which they invest.
Controversy has surrounded the CSDDD after it was altered by drafters following interventions from France, Germany and Italy. They were concerned that the rule would place too many burdens on their companies.
The revised regulation, drawn up by Belgian diplomats, attracted criticism that it had been de-fanged. Research by the Centre for Research on Multinational Corporations (SOMO) suggested that the revised regulation would bring in scope just 5,421 companies, a huge reduction from the 16,389 that had been in the frame when the regulation was passed in December. In particular, the number of German firms included in the scope of the regulation was almost halved.
Resilience Boost
Business groups and environmentalists alike have criticised the changes. Eurochambres, which represents a broad span of European industries, said the regulations would affect the functioning of supply chains and erode members’ competitiveness. The World Wide Fund for Nature, however, said the rules didn’t go far enough.
Mihailescu Cichon said the negotiations that brought the CSDDD to be finally approved were part-and-parcel of the process of bringing change.
“There’s always spirited debate when it comes to regulation and we’re in a pivotal moment in the ESG space, because we’ve had the era of pledges and commitments, which has brought a lot of idealism, which is wonderful, and now we’re pivoting into this era of implementation and when you do that, things can get thorny, things can get complicated,” she said. “All in all, I think it’s a pretty good balance of ambition and pragmatism.”
Professional services giant Deloitte expressed optimism that CSDDD would boost corporate resilience, a point made also by Mihailescu Cichon.
“A company that manages its risk in a comprehensive and forward-looking way will lower its overall risk profile, will lower the financial risks it potentially faces, will lower its reputational risks, and now their own regulatory risk,” she said. “It makes companies in scope a more attractive investment for investors because the company will be able to perform not just today but will continue to be a viable investment over time.”
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