Leveraging Assessments Across the CSRD and CSDDD as Regulatory Landscapes Shift

By Claire Kaula and Lara Hakki

Companies across sectors and geographies are looking to the European Union (EU) for guidance on how to evolve their approaches to human rights and environmental due diligence. Despite initial alignment around the EU Corporate Sustainability Reporting Directive (CSRD) and the EU Corporate Sustainability Due Diligence Directive (CSDDD), the EU Omnibus Simplification Package proposes revisions to both.

It can be overwhelming for businesses to understand what to do when mandatory human rights due diligence standards are in flux. This is especially true with respect to the regulatory uncertainty in the EU. However, despite the evolving legislative landscape, the UN Guiding Principles on Business and Human Rights (UNGPs) remains the dominant framework that responsible businesses should follow. Regulations should be the floor and not the ceiling of companies’ responsibility to respect human rights.

At the time of writing, the Omnibus Simplification Package is still working its way through the EU legislative process. While certain elements, such as scope and deadlines, are expected to change, the CSRD double materiality and the CSDDD risk mapping assessments are likely to remain central to their respective legislations. While these assessments look new in practice, they both broadly align with the approach to determining saliency, or importance, impacts set out by the UNGPs. Companies taking a UNGP-aligned approach to these assessments will both meet the foundational international standards and also be prepared for future regulatory requirements in the EU and elsewhere.

This blog post explores two key assessments required by the CSRD and CSDDD: namely, the double materiality assessment (for CSRD) and risk mapping assessment (for CSDDD). While both the CSRD and CSDDD support increased transparency and accountability for sustainability impacts, these assessments differ in their purpose and scope. Nevertheless, companies can leverage analyses completed between these assessments to ensure efficiency and consistency. Taking advantage of the additional time afforded by the Omnibus process by conducting these CSRD and CSDDD-aligned assessments now will not only allow companies to strengthen their existing commitments to human rights but also ensure they are prepared to meet future regulatory requirements.

Double Materiality Assessment versus Risk Mapping Assessment

The CSRD requires companies to conduct a “double materiality assessment” (DMA) to determine what social and environmental issues they are required to report on. Traditionally, companies were only required to report on financially material issues to explain how sustainability issues affected the company’s value. “Double materiality” requires companies to assess sustainability issues from two sides: (1) financial materiality, meaning how social and environmental issues affect the company’s value, and (2) impact materiality, how the company affects society and the environment. This approach recognizes that sustainability issues cut both ways—sustainability issues impact a company financially, and a company impacts people and the environment. Impact materiality is determined using the same saliency criteria (scale, scope, irremediability, and likelihood) and causality framework (cause, contribute, directly linked to) as the UNGPs. Once determined, companies must then report on their most material topics, both positive and negative. For a deep dive on CSRD double materiality assessments and how they reflect human rights impact assessments, see Article One’s blog here.

In contrast, the CSDDD requires companies to conduct a “risk mapping”. This type of assessment requires companies to identify human rights and environmental risks in their business and elements of their wider value chain and determine areas where risks are most severe and likely to occur, following the same saliency criteria (scale, scope, irremediability, and likelihood) as the UNGPs. Companies are expected to act on the results and address all risks, prioritizing and directing resources toward those most severe and most likely. This approach, like impact materiality within the CSRD, recognizes that companies can adversely impact society and the environment through their actions.

The key differences between these types of assessments are their 1) purpose and 2) subject scope.

1. The purpose of the CSRD double materiality assessment is to help companies determine what social and environmental topics they must publicly report on. By contrast, the purpose of the CSDDD risk mapping assessment is to help companies identify and prioritize the human rights and environmental issues they must address. For this reason, the results of each assessment are not equivalent. To illustrate, consider a case where a company identifies that a small, tier-2 supplier in their supply chain has charged migrant workers recruitment fees. Even if this is an isolated incident and may not be material to the company and would not need to be reported publicly under the CSRD, it would nevertheless count as a human rights impact that the company would have to address under the CSDDD.
2. The subject scope of what sustainability issues are covered in each assessment also differs. Each defines the universe of topics companies must look at. When it comes to what topics a company should assess, the CSRD provides a broad list of social and environmental issues, whereas the CSDDD points to specific rights, prohibitions, and obligations under international law. These largely align but do not perfectly overlap. For example, a topic like gender diversity at top management level and the age distribution of a company’s own workforce may be assessed under the CSRD, but would not fall within the due diligence obligations of the CSDDD unless it is linked to covered human rights instruments or rights and prohibitions, like the prohibition of unequal treatment in employment.

Despite proposed changes in the Omnibus, the purpose and subject scope of both the DMA and the risk mapping are likely to remain.

Given that, companies should stay the course and see the additional time afforded by Omnibus discussions as an opportunity to begin the CSRD DMA and CSDDD risk mapping assessment. Doing so will support alignment with the UNGPs, which are evergreen in business and human rights.

In moving forward with both assessment, companies set themselves up for success by:

• Establishing cross-cutting communication or working groups between teams working on the DMA and risk mapping.
• Ensuring there is a company-wide, consistent approach to applying the UNGP criteria of severity (scale, scope, irremediability) and likelihood.
• Utilizing existing UNGP-aligned human rights saliency assessments and aligning future human rights saliency assessments to meet the CSDDD risk mapping requirements.

As we await the outcome of the Omnibus Simplification Package, companies who advance DMAs and risk mapping assessments will be well prepared to meet upcoming CSRD and CSDDD requirements while aligning with the international standards that inform both assessments. The UNGPs and the standards they underpin, like the OECD MNEs, remain the foundational global standards guiding responsible business conduct. In short, legal frameworks may shift, but the fundamental responsibility to conduct meaningful due diligence, and the benefits of doing so, remain unchanged.

Article One continues to monitor upcoming regulatory changes and works with clients across the globe on maintaining regulatory alignment for their human rights practices. For more information on Article One’s work in this area, please get in touch with us at hello@articleoneadvisors.com.