CSDDD:Using a Risk-Based Approach to Address Human Rights and Environmental Impacts in Supply Chains

In many ways, the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) effectively codifies the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Due Diligence Guidance for Responsible Business Conduct into law. It includes one of the most critical concepts from those voluntary standards: the expectation that companies take a risk-based approach to addressing upstream and downstream human rights and environmental impacts across the value chain, rather than focusing on impacts associated only with direct business partners (i.e., Tier 1), which tend to be less severe.

With good reason, companies are asking practical questions regarding the feasibility of assessing impacts across entire networks of direct and indirect business partners. Fortunately, these are the same questions the business and human rights field has been grappling with for more than a decade, and practitioners have made significant progress in developing practical ways of fulfilling such a challenging requirement.

Risk-based due diligence concentrates less on following the chain of business relationships tier by tier and more on high-risk value chain segments where adverse impacts are more likely. In practice, this means that when companies are determining where to conduct an impact assessment, they can skip a Tier 1 relationship and jump directly to the main source of the human rights or environmental impact, e.g., at the extraction site of a key commodity, which has well-documented concerns regarding discharge of chemicals into local water sources.

The CSDDD’s risk-based approach, which aligns with the UNGPs, OECD Guidelines, and the Corporate Sustainability Reporting Directive (CSRD), involves mapping activities across the supply chain, identifying areas of risk, and assessing existing efforts to mitigate impacts. Crucially, relevant stakeholder engagement informs each phase of the approach, with the CSDDD articulating a clear expectation for meaningful engagement with stakeholders—including rightsholders—throughout each step of the due diligence process.

Mapping Activities Across the Supply Chain

In CSDDD Article 8.2.a., the first step entails an actual mapping of a company’s “chains of activities,” (CSDDD Article 3.1.g) which means not just Tier 1 relationships, but understanding the broader context related to the supply of raw materials, products, or parts of products that are connected to a company’s Tier 1 relationships. For example, if a company produces electric vehicles, then there is an expectation to map (and eventually assess and engage, as described below) down to the lithium and cobalt extraction sites, where typically the greatest human rights and environmental impacts lie.

Stakeholder engagement should inform the mapping exercise and can mean different things in the supply chain context, depending on where in the supply chain such activities are being conducted. Where direct stakeholder engagement is not possible (e.g., direct interviews with workers at the cobalt mine), CSDDD allows for engagement by proxy, such as with representative NGOs or civil society organizations, academics, or other types of experts who have a good understanding of human rights and environmental impacts on the stakeholders and rightsholders.

Identifying Areas of Risk

The second step involves conducting a high-level risk analysis to help prioritize due diligence efforts. Many companies deploy a mix of sources to apply risk categorization to their extended supply chains, considering factors such as country risk, product/service/commodity risk, and more. These often rely on a combination of publicly available indices as well as fee-based databases and involve qualitative and quantitative considerations.

Stakeholders should also be consulted to offer insights on the analysis, reflecting on both the risks themselves and the prioritization of risks. Such risk analyses are usually done on a periodic basis (e.g., once a year), but the best approaches can factor in both real-time and future-scenario considerations, such as a war or an adverse climate event happening in a sourcing country not previously identified as high risk.

Assessing Existing Efforts to Mitigate Impacts

The third step considers whether existing management systems are robust enough to manage the identified impacts and whether existing information can be leveraged to paint a more complete picture. For example, if a buying company uses a human rights or environmental impact assessment report of a supplier closely connected to a particular supply chain, then the buyer obtains a clear understanding of the actual and potential human and/or environmental impacts of a particular supply chain far upstream (CSDDD Article 8.4). This helps prioritize buying companies’ and suppliers’ resources, avoids repetition, and leverages the efforts of peers and other stakeholders.

Together, these three steps in the risk mapping process help answer the very important question of where to begin: by identifying the activities of the company’s chain most at risk and providing an informed set of priorities. Once this exercise has been completed, the company should have a much clearer sense of where to focus its energy and resources when conducting human rights and environmental assessments, focusing on the areas of greatest human rights and environmental impacts—as confirmed through stakeholder engagement—and applying a severity and likelihood analysis as informed by the UNGPs.

Identifying Human Rights and Environmental Impacts through Multi-Stakeholder Initiatives

In addition to direct stakeholder engagement, multi-stakeholder initiatives offer a way for companies to identify actual or potential human rights and environmental impacts deep in supply chains in a way that individually may otherwise be too burdensome. Such initiatives can also serve as critical proxy representatives, with the added benefit of potentially reducing engagement fatigue of suppliers, NGOs, or other groups receiving numerous requests from companies across supply chains. Depending on the nature of the initiative, they may help companies aggregate resources and leverage to address a particular issue, achieving greater positive impact in a given sector over time than any single company could acting in isolation.

One such example is Action for Sustainable Derivatives (ASD), a collaborative initiative co-facilitated by BSR and partner organization Transitions, which conducts collective grievance monitoring on behalf of its members. It also organizes monthly discussions with key NGOs to align on priority concerns, deepen mutual understanding of details and root causes of grievances, and agree on recommendations for the sector to address the impacts.

A Pragmatic and Logical Roadmap

Mapping, identifying, and assessing human rights and environmental impacts in upstream and downstream value chains is a comprehensive task that should not be underestimated, and makes up the first major step in an overall due diligence process, before those impacts can be remedied and/or mitigated. This is not only due to the breadth and depth of most corporate supply chains, as issues like a lack of leverage, lack of transparency and traceability, and more, exacerbate these challenges. Regulations requiring companies to take these actions have increased significantly in recent years, and failing to take the necessary steps can have legal, reputational, and financial consequences.

Fortunately, CSDDD provides a pragmatic and logical roadmap that acknowledges these challenges and encourages companies to seek out solutions through a methodical approach and active stakeholder engagement. Such collaboration and engagement with stakeholders is explicitly called out in the CSDDD and includes civil society, NGOs, national human rights and environmental institutions, defenders, and more. Each can play a role in the identification, mitigation, and remediation of human rights and environmental impacts.

If you would like more information on meeting the CSDDD’s expectations, please reach out to BSR’s Human Rights team.

This article was originally published at the BSR website "Sustainability Insights" and is written by Salah Husseini, Director, Human Rights, Taylor Hannegan, Manager, Human Rights and Collaborative Initiatives, and Renata Greenberg-Frolova, Director, Tarnsformation, at BSR.