The “Summer of CSRD” series – conducting due diligence

The EU’s Corporate Sustainability Reporting Directive will have broad impact. Approximately 50,000 undertakings are expected to have a reporting obligation. The recently finalized European Sustainability Reporting Standards specify the information required to be reported under CSRD.

As we recently posted, this summer’s ESG must-read is ESRS 1, which contains the general requirements applicable to CSRD reporting. The objective of ESRS 1 is to provide an understanding of the architecture of the ESRS, the drafting conventions and fundamental concepts used and the general requirements for preparing and presenting sustainability information in accordance with CSRD.

Understanding ESRS 1 is therefore critical to preparing for CSRD reporting. It will drive not only disclosure, but also the underlying processes and controls. As a threshold matter, understanding ESRS 1 also is important for developing the project plan for CSRD readiness.

Posts in this “Summer of CSRD” series discuss selected aspects of ESRS 1, in a bite-sized read, in more or less the order presented in ESRS 1.

In the last post, we discussed disaggregated reporting.

In this post, we discuss due diligence, which is addressed in ESRS 1, chapter 4.

Due diligence defined

Due diligence is the process by which undertakings identify, prevent, mitigate and account for how they address the actual and potential negative impacts on the environment and people connected with their business. These include negative impacts connected with the undertaking’s own operations and its upstream and downstream value chain, including through its products or services, as well as through its business relationships.

Due diligence is an on-going practice that responds to and may trigger changes in the undertaking’s strategy, business model, activities, business relationships, operating, sourcing and selling contexts.

Relationship to the materiality assessment

The outcome of the undertaking’s sustainability due diligence informs its assessment of its material impacts, risks and opportunities (IROs).

The severity and likelihood of impacts informs the assessment of material impacts. The identification of material impacts also supports the identification of material sustainability risks and opportunities, which are often a product of the impacts.

Due diligence process

The ESRS do not contain specific conduct requirements for due diligence. The due diligence process is described in the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (see our post on the June 2023 updates to the Guidelines). These instruments identify the steps in the due diligence process, including the identification and assessment of negative impacts connected with the undertaking’s own operations and its upstream and downstream value chain, including through its products or services, as well as through its business relationships.

As noted in ESRS 1, when the undertaking cannot address all impacts at once, the UN Guiding Principles and the OECD MNE Guidelines allow for actions to be prioritized based on the severity and likelihood of the impacts.

Due diligence responsibilities

ESRS 1 notes that the ESRS do not extend or modify the role of the undertaking’s administrative, management or supervisory bodies concerning conducting due diligence.

Related disclosure requirements

The core elements of due diligence are reflected directly in Disclosure Requirements in ESRS 2 and in the topical ESRS, including those disclosure requirements relating to (1) embedding due diligence in governance, strategy and business model, (2) engaging with affected stakeholders, (3) identifying and assessing negative impacts on people and the environment, (4) taking action to address negative impacts on people and the environment and (5) tracking the effectiveness of these efforts.

Next up: the value chain.

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