CSRD and CSDDD: Why the supply chain is make or break for corporate compliance

Half of the world’s 100 largest private companies do not currently have emissions reduction targets.

In January of this year, the EU launched the Corporate Sustainability Reporting Directive (CSRD) into action, intending to significantly increase transparency in the field of corporate sustainability.

The Directive extends sustainability reporting requirements in the EU from 11,000 to about 50,000 companies, covering businesses that were previously covered by the Non-Financial Reporting Directive (NFRD).

The Directive mandates reporting on value chain greenhouse gas emissions (Scope 3) and action taken to address them, from 1 January 2025 for the largest private firms.

Additionally, the CSRD extends its jurisdiction to specific non-EU listed or non-EU parent companies, necessitating global awareness and compliance efforts among businesses worldwide.

However, new analysis from Net Zero Tracker has revealed that half of the world’s 100 largest private companies do not currently have emissions reduction targets, leaving them exposed to civil scrutiny, investor pressure and mandated disclosure requirements.

Net Zero Tracker’s project lead John Lang said: “If ‘sunlight is the best disinfectant’ for climate inaction, most private firms are operating nocturnally.

“What goes on in the EU does not stay in the EU. And what goes on in a regulated public company will not stay in a public company: one company’s indirect emissions are another’s direct emissions.”

The analysis highlights that the disparity between the climate objectives of the top 100 private companies worldwide and those of their publicly listed counterparts is growing, resulting in an uneven playing field for companies, investors and policymakers alike.

Private firms lag public on net-zero integrity

Among the top 100 companies analysed, 38 private firms with a collective annual revenue of $2.1trn have set net-zero targets, accounting for almost half of the total combined revenue.

In contrast, seven-tenths of publicly-listed firms, totalling 70 companies with a combined annual revenue of $13trn, have established net-zero objectives, representing a significant majority of the total combined revenue of the top 100 public firms, which stands at $18.1trn.

Moreover, among the 21 largest private companies headquartered in the EU and the UK, 68% (19 out of 28) have set net-zero targets. However, only a minority (3 out of 19) have disclosed strategies to accomplish these targets.

In contrast, 92% (22 out of 24) of the EU and UK-based public companies in the study have established net-zero objectives, with 95% (21 out of 22) of them having detailed plans to meet these targets.

Net Zero Tracker’s data lead Camilla Hyslop said: “Most private companies are swimming against the net-zero tide, while most listed firms are lengthening their stroke in the opposite direction, towards a clean, prosperous future.

“The alarming reality that half of the largest 100 private companies, whose revenues make them ‘too big to fail’, have opted out of setting any climate targets, leaves both their home countries and global supply chains exposed to serious transition risk.”

In addition to falling behind in net-zero commitments, the analysis emphasises that private companies globally also exhibit a deficiency compared to their public counterparts regarding the transparency and integrity of their targets.

For instance, in terms of transparency, 63% (24 out of 38) of the largest private firms fail to clarify whether they plan to utilise carbon credits, a practice widely deemed as controversial and unfavourable.

Failure to adhere to the CSRD may result in penalties for these companies. However, beyond financial consequences, non-compliance can tarnish a company’s reputation and damage stakeholder trust.

Aside from the CSRD, the EU’s forthcoming Corporate Sustainability Due Diligence Directive (CSDDD) presents another challenge for the corporate sector. Businesses have expressed concerns that their existing supply chains would not meet the requirements of this directive.

Regulatory challenges for supply chains under CSDDD

Last month, after series of talks, the EU finally approved the CSDDD, in an effort to get the legislation over the line before this summer’s elections.

The Directive requires both EU and non-EU companies to perform environmental and human rights due diligence throughout their operations, subsidiaries and value chains.

It will apply to businesses with 1,000 or more employees and with an annual turnover of €450m or more. There are some 5,300 businesses operating in the EU that meet these criteria.

Companies that fail to meet requirements under the CSDDD, which will be phased-in from 2027, risk fines of a minimum of 5% of their global net turnover.

Nevertheless, a new report has revealed that business leaders expect at least half of their supply chain to not be CSDDD compliant in the next two years.

This is according to the DWF’s ‘True Diligence’ report, which surveyed nearly 1,200 C-suite leaders from companies with a minimum global turnover of at least €150m that are based in France, Germany, Italy, Poland, Spain or the UK.

While many of these organisations have already committed to initiatives such as the UN Guiding Principles on Business and Human Rights, the proposed CSDDD is the first regional piece of regulation to bring together human rights, climate and environmental obligations.

The survey found that 57% predict that most businesses will not comply fully with the legislation by 2030.

The report also revealed that organisations are failing to measure the negative human rights impacts of their business operations, with only half of C-suite leaders reporting that their organisation currently measures it and 32% measure the impacts of its immediate suppliers.

Nearly six in ten C-suite leaders believe that their business needs clear regulation to drive immediate action when it comes to addressing its impact on climate change, the environment and human rights; however, only 27% of C-suite leaders said that their organisation currently understands the application of the CSDDD to their business.

Corporates are advocating for regulators to offer a standardised template that businesses can utilise to navigate and comprehend the implications of the new Directive.

DWF’s head of sustainable business Tracey Groves said: “The CSDDD has the potential to empower businesses to increase their transparency mechanisms and address the greatest risks to people and the planet in their value chain.

“The report has exposed a knowledge gap between C-suite leaders and regulatory expectations.

“To embrace greater accountability and drive meaningful change, regulators must provide a template for businesses to work from and a portal to access this information.”

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