Richard Gardiner, EU Public Policy Lead at the World Benchmarking Alliance, says CSDDD offers a rare opportunity to improve corporate human rights risk accountability.
The EU’s recently approved Corporate Sustainability Due Diligence Directive (CSDDD) has the potential to systematically change the way corporations approach their human rights risks, both within their operations and supply chains. It will do this by setting a legal baseline outlining exactly how the largest multinationals operating in the EU are expected to address these risks across their global supply chains.
The passing of this law has been hailed as a significant victory in the sustainability community. Investors in particular should be paying close attention to these developments, as CSDDD presents both challenges and opportunities that can significantly impact their portfolios.
Why CSDDD matters to investors
One of the most compelling reasons for investors to care about and invest time in understanding CSDDD is the enhanced leverage it provides. The law offers a legal and political framework to mandates companies to proactively tackle their human rights risks, which investors can utilise to push for greater corporate accountability. By directly referencing these legal obligations, investors can exert pressure on companies to engage more deeply with human rights issues within their value chains. Unlike the existing voluntary global standards, the leverage provided by CSDDD is not just theoretical. It has practical implications for improving corporate behaviour and, by extension, protecting the long-term value of investments.
Investors are not merely passive observers of corporate performance but have a proactive role to play. By incorporating CSDDD in their responsible investment practices, investors can ensure that the leverage provided is not just a by-product of the law but becomes a mainstream expectation across the investment community. This mainstreaming is vital for preventing and addressing both current and potential negative impacts on people, managing financial risks, and meeting the evolving expectations of beneficiaries, civil society, regulators and clients.
Current landscape and investor opportunities
This pressure point is more important now than ever. Data from the World Benchmarking Alliance’s Corporate Human Rights Benchmark (CHRB) underscores the urgency of CSDDD. Although 66% of benchmarked companies in high-risk sectors have demonstrated improvement on key human rights indicators, a staggering 40% still disclose no or insufficient evidence of a human rights due diligence process. This indicates a significant gap between current practices and the standards that the CSDDD aims to enforce. Investors, armed with the enhanced leverage provided by the law and insights on performance, can play a crucial role in bridging this gap.
Even though the final application of CSDDD will only come in 2027, there is no need to wait until then to start pushing for change. Investors can already begin to urge companies to proactively engage in due diligence processes and establish measures needed to comply with the law. Early compliance will not only position companies favourably with regulators and the public but also mitigates risks to their financial performance and reputation.
Steps investors could take
Below, we identify three opportunities offered by CSDDD to help investors reduce human rights risks at portfolio companies.
Demand transparency – Investors can call on their investee companies to be transparent about who is responsible for implementing CSDDD, their internal capacity-building efforts, and any necessary changes in practices. This can include management and worker training programs, revising existing practices, or introducing new components such as grievance mechanisms.
This investor pressure and engagement can lead to companies being more open and honest about their overall timeline for CSDDD preparation and implementation. It can be a means to pushback against short termism and to ensure that companies engage in sustainable supply chains and prioritise long-term growth over short-term profits.
Engage in active scrutiny – Investors can and should demand that companies outline in detail how they plan to prepare for and implement CSDDD requirements, including the use of social audits, participation in multistakeholder initiatives, and impact assessments. This information allows investors to scrutinise and question the validity of these plans and understand whether they are sufficiently realistic and comprehensive.
Often, companies identify potential risks but fail to assess which are most salient. Investors should advocate thorough saliency assessments which consider business models, operational locations, and socio-economic factors.
Push for supplier engagement – Investors should use CSDDD to demand clarity on how companies intend to engage with their suppliers as part of their due diligence processes. This should include the metrics and data sources companies will use for risk identification, assessment methodologies, and timelines for engagement to mitigate these risks.
An invaluable tool
The CSDDD will reveal how companies manage their value chains, helping investors make informed choices about where to invest. By leveraging CSDDD, investors can play a crucial role in driving corporate accountability and ensuring sustainable and ethical business practices. While the law is not a silver bullet, if used correctly, it can be a seismic step forward in ensuring that companies take their human rights responsibilities seriously. Therefore, this law provides investors with an invaluable tool to enhance corporate accountability, manage financial risks, and align with the growing demand for responsible investment practices.
The new directive is a massive open goal for investors, and they will rarely get another opportunity to score on pushing corporate to both open up and act on their sustainability risks. Leveraging these opportunities are not only a strategic necessity, but also a moral imperative. It enables the investment community to not only protect and enhance their own investments but provide a massive contribution to a more ethical and sustainable business environment.
This article was co-authored by Annabel Mulder, Human Rights Senior Researcher at the World Benchmarking Alliance.
