Sustainability has ceased to be a debate of intentions and has become a business and regulatory requirement. Following the CSRD and the definition of the ESRS, Omnibus Agreement changes to the CSRD, the CS3D and the ESRS another far-reaching European move arrives: the Corporate Sustainability Due Diligence Directive, known as CSDDD (Corporate Sustainability Due Diligence Directive), driven by the European Commission Corporate Sustainability Due Diligence Directive (CSDDD) – International Partnerships.
Many SMEs have not yet heard of it, but the reality is that, when it applies (in mid-2029), it will affect every company that forms part of the value chain of European corporations. And that means that thousands of SMEs will have to demonstrate far more information than they think.
What exactly the CSDDD is
The CSDDD is a European directive that will require large companies to identify, prevent and mitigate social, environmental and governance (ESG) risks across their entire value chain.
This due diligence covers:
- human rights and working conditions,
- environmental and climate change risks,
- responsible governance,
- impacts on direct and indirect suppliers.
Although most of the obligations fall on large corporations, SMEs —especially industrial companies and suppliers— will be the first to be called upon, because they will have to provide information that allows their customers to comply with the law.
It is a profound change. It will no longer be enough to “comply with local regulations”, since SMEs will have to demonstrate that they understand the ESG risks of their business and that they have basic systems to manage them.
How this will affect SMEs
Although the CSDDD does not directly bind SMEs, it will affect them de facto, for three reasons.
1. Large companies will pass part of the obligations on to their suppliers
To comply with the CSDDD, they will ask for:
- environmental and social policies,
- evidence of due diligence,
- ESG risk analysis,
- incident management processes,
- traceability of materials and subcontracting.
2. Financial institutions will ask for more ESG information
Banks are integrating ESG criteria as a result of the European Taxonomy and the CSRD.
3. Public administrations and tenders will incorporate due diligence criteria
SMEs seeking public contracts will have to demonstrate good ESG practices.
What SMEs will need to have
Although the CSDDD may sound complex, what is asked of SMEs is proportionate and realistic.
1. Identify ESG risks
- Energy, water, waste, emissions
- Social and labour risks
- Subcontracting and traceability
2. Have minimum policies in place
- environmental policy
- social and human rights policy
- code of ethics
3. Basic due diligence procedures
- incident management
- ESG criteria for suppliers
- improvement plans
4. Report transparently
And this is where a key EU piece comes in: the VSME.
CSDDD + VSME: the combination that will shape the future of SMEs
To prevent SMEs from drowning in bureaucracy, the European Commission asked EFRAG to develop simple reporting standards for SMEs: the VSME (Voluntary ESRS for non-listed SMEs). VSME Voluntary Sustainability Standards for SMEs
The VSME offer SMEs:
- a single, simplified European model for ESG information,
- direct alignment with the ESRS for large companies,
- a common language for answering questions from customers, banks and public administrations.
It is probably the tool that will make it easiest —in practice— to demonstrate compliance with the CSDDD without unnecessary bureaucracy.
Conclusion
The CSDDD is a structural change in the way Europe understands corporate sustainability. Large companies will have to comply with it, but SMEs will be a fundamental pillar of it.
Those that move early and structure their ESG information with tools such as the VSME will hold a strategic position from which to compete and grow.
auma supports companies in understanding what is and is not relevant in the CSDDD text, identifying ESG risks swiftly, creating minimum policies and protocols, implementing proportionate due diligence systems, preparing information in line with the VSME model and answering ESG questionnaires from customers and banks.
The aim is for regulation not to be a burden, but an opportunity for competitiveness.