CSDDD: Are Companies Ready for EU Regulations?

The Corporate Sustainability Due Diligence Directive (CSDDD) is set to reshape corporate responsibility across Europe.

Driven by the need for greater social and environmental accountability, this EU directive requires firms to actively monitor and manage the impact they and their suppliers have on society and the environment.

However, recent research suggests many companies remain underprepared for the significant shift in operations, systems, and reporting that compliance will require.

A study by EQS Group and the University of Applied Sciences Ansbach highlights serious challenges facing companies ahead of CSDDD’s phased implementation, revealing worrying gaps in supply chain transparency and the resources required to comply.

Supply chain transparency gaps

The new directive enforces a duty for companies to identify, mitigate and prevent harmful impacts throughout their supply chains.

However, when EQS Group and Ansbach University surveyed over 400 companies across Europe, they found that significant gaps in transparency are widespread.

Many companies struggle to obtain clear, detailed information from their suppliers, particularly when sourcing from complex, global supply networks.

According to the study, one of the primary challenges in meeting the CSDDD’s requirements is resource limitations. Firms point to inadequate personnel, budget, and digital tools as the biggest obstacles to achieving compliance.

While the directive places heavy emphasis on documentation and reporting, a lack of visibility into suppliers’ practices and activities makes it difficult for companies to track, verify, and demonstrate compliance.

Although nearly a third (30%) of firms are planning to allocate additional resources to support compliance, this still leaves the majority under-resourced and potentially vulnerable to future penalties. With CSDDD set to take effect in stages over the next five years, large companies will be the first to meet compliance deadlines, while smaller businesses will have a slightly longer timeframe.

Nonetheless, many companies have yet to make the necessary investments in staff, budget, and IT infrastructure needed to meet the directive’s expectations.

Compliance comes with high penalties for non-compliance

As the CSDDD becomes EU law, companies will face significant risks for non-compliance, with fines reaching up to 5% of their global turnover.

Supervisory bodies will be set up within each EU country to monitor and investigate corporate compliance. Businesses with 5,000 or more employees, or €1.5bn+ (US$1.63bn) turnover, will be required to comply by 2027; those with more than 3,000 employees or €900m+ (US$979m) turnover by 2028; and companies with more than 1,000 employees or €450m+ (489m) turnover by 2029.

One of the report’s key findings is that, while many firms feel confident about managing risk within their own operations, 84% of respondents indicated a low risk level in this area, perceived risks rise sharply further down the supply chain. More than half (55%) of surveyed companies assess the risk of human rights and environmental violations by indirect suppliers as high or very high, while 41% rate these risks as medium.

Professor Dr Stefanie Fehr, a lead researcher on the project, notes the challenges this directive poses, especially for companies with complex global supply chains.

“The deeper you go into the value chain, the more complex the risks become,” she states, “posing significant challenges for businesses seeking to comply with the new regulation. A proactive, risk-based approach is essential.”

ESG priorities and technology solutions on the rise

As companies work to meet CSDDD obligations, the research indicates that many are integrating ESG factors into their risk management processes.

Human rights and environmental protections are becoming core considerations in the selection of suppliers, with 68% of companies factoring these criteria into their supplier risk assessments.

Technology is also playing an increasingly prominent role in supporting compliance, with 26% of companies surveyed relying on digital tools to help monitor, evaluate and manage supplier risks.

Achim Weick, Founder and CEO of EQS Group, recognises the dual nature of this challenge, noting that global supply chains present “not only challenges, but also significant opportunities to build a more sustainable infrastructure.”

He sees the CSDDD, alongside Germany’s own Supply Chain Due Diligence Act, as a chance for companies to boost trust with both customers and business partners by committing to higher standards.

“By investing in transparency and responsibility now, companies can gain a lasting competitive advantage,” Achim says, adding that increased investment in technology is essential for addressing staff shortages and meeting compliance expectations.

Ultimately, the CSDDD marks a step forward in the EU’s commitment to sustainable and socially responsible business practices. It demands that companies look beyond their own operations and take responsibility for their supply chains, thereby fostering greater accountability across global industries.

With hefty fines in place for those that fall short, companies face pressure to step up their compliance efforts, not only to avoid penalties but also to embrace the advantages of a more sustainable and transparent approach.

As Achim concludes: “By investing in transparency and responsibility now, companies can gain a lasting competitive advantage.”

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