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Frequently Asked Questions about the EU Corporate Sustainability Due Diligence Directive

In this resource, Rachel Davis (Co-Founder), and Ruben Zandvliet (Deputy Director for Standards), answer companies’ frequently asked questions about the new Corporate Sustainability Due Diligence Directive.

Since the approval of the Corporate Sustainability Due Diligence Directive (CS3D) by senior officials from EU Member States in Council on 15 March, we’ve received numerous questions from companies about where it’s landed and what it means for businesses’ responsibility to respect human rights. With the legislation now weeks away from the finish line, we thought it was a good time to help clear up some of the confusion we’ve been hearing.

This is the first in a series of free, publicly available resources where we’ll be unpacking a few of the common questions – and misconceptions – about the Directive and its relationship with the international due diligence standards, just as we have done for the Corporate Sustainability Reporting Directive. This includes:

  1. What is Human Rights Due Diligence and where does it come from?
  2. Is the CS3D some new kind of ‘European due diligence’? 
  3. Is the CS3D aligned with the international due diligence standards on business and human rights?
  4. What is the role of administrative supervision in the enforcement of the CS3D?
  5. What does civil liability in the CS3D apply to? What does this mean for companies?
  6. What about Member States – what are they required to do?
  7. As a company, what can I do now?
  8. What about impacts in downstream business relationships – are these still covered by legislation?

Whether these are your first steps as a company on the sustainability due diligence road, or you’re well on your way, we hope these resources will help you take the CS3D confidently in your stride.

As a non-profit organization, Shift has been committed to advancing business respect for human rights from the get-go – first in our role helping to draft the UN Guiding Principles on Business and Human Rights (UNGPs), and in the decade since their adoption, embedding them into business practice with companies, financial institutions, civil society organizations and standard-setters around the world. 

Tackling Child Labor: A Guide for Financial Institutions

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In June 2023, following concern from member banks over the persistent scourge of child labor in global value chains and recent reports of the alarming increase in child labor – particularly migrant child labor – in the United States, Shift held a peer-learning session of its Financial Institutions Practitioners Circle on the topic. The session explored how banks and financial institutions can strengthen their efforts to respect children’s rights, particularly in the context of child labor. As a report by UNICEF, Save the Children and the UN Global Compact noted, children are still too often invisible in ESG reporting; and the financial sector can play an important role in changing this. 

This resource is a joint publication by Shift, The Centre for Child Rights and Business and UNICEF. It captures some of the key take-aways from this session, and draws on the experience of the three organizations working with real-economy companies and financial institutions. 

Shift’s Response to the UN Working Group Consultation on Investors, ESG, and Human Rights

In 2016, ESG investing amounted to US$ 22.8 trillion of global assets – by 2025 it’s expected to reach US$ 53 trillion.[1] Yet, while lenders and investors are increasingly using Environmental, Social and Governance (ESG) indicators in their decision-making processes, confusion about metrics persists, particularly when it comes to the ‘S’ in ESG. So, it’s vital that these approaches align with the UN Guiding Principles on Business and Human Rights, which leading financial institutions, states and businesses have been working to implement for over a decade.

In June 2024, the United Nations Working Group on Business and Human Rights will present a report to the UN Human Rights Council on the approaches to ESG taken by financial institutions, including investors, in recognition of their “unparalleled ability to influence companies and scale up on the implementation of the Guiding Principles”.[2] The report will provide guidance for governments, financial actors and others, on aligning ESG approaches with the UN Guiding Principles. As part of this, the group put out a call for input from a variety of stakeholders to inform their recommendations.

This response is Shift’s submission to the consultation, which builds on a decade of experience working with a range of financial actors, including investors, to drive successful implementation of the UN Guiding Principles on Business and Human Rights. For over 10 years, we’ve been supporting financial institutions to identify, assess, and manage the adverse impacts on people associated with their financing activities. In that time, the landscape has changed significantly – marked by new regulatory incentives, increased data availability, and a growing appreciation of the value of robust due diligence processes to financial institutions.

[1] ESG assets may hit $53 trillion by 2025, a third of global AUM, Bloomberg, via OHCHR

[2] P.15, para 77, A/HRC/47/39, Guiding Principles on Business and Human Rights at 10: taking stock of the first decade

Aligning the EU Due Diligence Directive with the International Standards: Key Issues in the Negotiations

Aligning the CS3D with the core concepts in the international standards

The EU is currently in the process of negotiating a legal instrument that will establish new corporate human rights and environmental due diligence duties across the single market – the draft Corporate Sustainability Due Diligence Directive (CS3D). At the heart of the negotiations is how to ensure the CS3D is meaningful in driving better human rights and environmental outcomes while also being manageable for companies.

This crucial phase of negotiations is a vital opportunity to align the CS3D with the core concepts in the international standards. The international standards on sustainability due diligence – the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises (OECD Guidelines) – help answer precisely that question, so it’s not surprising that the negotiators’ positions have increasingly built on the core concepts in these standards. Not only have they been shown to work in practice – diverging from them in the CS3D would risk creating a fragmented and confused approach, especially for the many companies that have already been working to implement them.

In this report, Shift takes stock of where progress has been made – and where work still remains – to ensure greater alignment between the positions of the three EU political institutions – the Commission, Council and Parliament – and the international due diligence standards.

Human Rights Defenders and Shrinking Civic Space: A Guide for Financial Institutions

From early warnings to controversy data, investors and lenders are increasingly recognizing their reliance on civil society and human rights defenders for their human rights due diligence (for more see No News is Bad News, the product of a collaboration between ABN AMRO, APG, ING, Robeco, and Morningstar Sustainalytics). This includes the essential insights they provide on salient human rights issues that are material impacts in client portfolios (e.g. for CSRD) include those impacts on people related to climate change and biodiversity loss – to which banks are connected through their financing of clients and transactions.

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However, the civic space necessary for this important work is being increasingly restricted (see People Power Under Attack, CIVICUS Monitor, 2022). In 2022 alone the Business and Human Rights Resource Centre tracked 555 lethal and non-lethal attacks against human rights defenders. And according to Global Witness’ report, Standing firm: The Land and Environmental Defenders on the frontlines of the climate crisis, at least 177 land and environmental defenders lost their lives last year.

So, what role can – and should – financial institutions play in addressing shrinking civic space? In our latest Financial Institutions Practitioners Circle report, Human Rights Defenders and Shrinking Civic Space: A Guide for Financial Institutions, we explore key aspects of this challenge, including how banks can start to overcome the barriers they may face when engaging with civil society and human rights defenders.

Living Wage Accounting Model and Progress Tool

Developing a Living Wage Accounting Model

Shift, together with the Capitals Coalition, has spent two years working with companies, investors, standard-setters, living wage initiatives and accounting experts to develop an accounting model for living wages to enable standardized, meaningful, and comparable reporting on progress made by companies in their own workforces and supply chains.

Efforts to tackle growing levels of inequality and poverty around the world are increasingly focused on the payment of a living wage. That’s because realizing the human right to a living wage is essential to raising the living standards of the most vulnerable workers and their families – and to fulfilling a range of other human rights, including rights to food, water, health, adequate housing, education, family life, and fair working hours.

The wider impact on society is also clear. Studies have shown that reductions in poverty and inequality can lead to greater social cohesion, as well as benefits to business. Paying a living wage can deliver not only a more motivated and productive workforce, with lower staff turnover, but also improved revenues and profits and increased value chain resilience and performance.

Measuring and reporting on living wage progress is essential to driving better outcomes for workers, businesses, and for society.

Investors are increasingly interested in whether companies are taking action on living wages, and if so, whether those actions are having any positive impact on workers’ wages. To be able to make an informed assessment of this aspect of a company’s performance, investors need access to reliable and comparable data.

Measuring Progress on Living Wages

Until now, there has not been a generally agreed, straightforward and measurable way for companies to reflect their work to achieve living wages in their public reporting. As a result, investors, civil society and other interested stakeholders have not been able to access the information they need to compare companies’ progress, assess which are contributing to the solution and push those sitting on the sidelines to play their part.

“To get more companies to walk the talk on paying a living wage, we need to define what success looks like, and how to measure progress along the way. And we need common metrics for companies to account for that change in their public reports. Only then can markets reward those companies that are part of the solution to today’s growing inequalities, and push others to play their part.”

Caroline Rees President of Shift

The Accounting for a Living Wage project has resulted in a model that helps paint a picture of the scale and scope of the living wage deficits experienced by workers, as well as progress towards living wages over time. Having a shared and simple methodology to track and report on progress has proven key to the success of similar efforts to embed sustainability goals in business decision-making. This Living Wage Accounting Model has the potential to play a catalytic role in:

  • Delivering greater transparency regarding the payment of Living Wages
  • Informing new standards around Living Wages
  • Creating incentives for improving wages and reducing inequalities.

These resources are designed to support the work of:

  • Businesses – who can use the model and tool to measure and disclose their progress on living wages in a standardized way
  • Standard setters – who can embed the model in their standards to ensure that companies provide valuable, comparable information
  • Investors and CSOs – who can use the information disclosed by companies to make assessments and incentivize better performance

The Living Wage Accounting Model Tools

3 resources
September 2023
A Model to Measure Progress on Living Wages

The background to the project and the rationale for developing a model to measure progress on living wages.

Download
September 2023
Using the Living Wage Accounting Model

The metrics, basic and expanded disclosures and accompanying statements of methodology that companies can follow to measure and report their progress on living wages.

Download
September 2023
Contextual Indicators

A set of additional disclosures that draw on existing indicators related to living wages. When used in conjunction with the Accounting Model, these disclosures provide companies with a comprehensive Living Wage Reporting Framework that follows the ISSB four-part framework of Governance, Strategy, Risk Management and Targets and Metrics.

Download

Coming Soon: Living Wage Progress Tool
A customizable and downloadable tool that facilitates use of the model by performing all the calculations needed for the disclosures, based on wage and related data entered by companies.

Shift’s Submission to the ISSB’S Consultation on Agenda Priorities

The ISSB has proposed that two of the four options for inclusion in its agenda priorities for the next two years could be ‘human capital’ and ‘human rights’: both social-related topics. This is an important and welcome signal, which in turn reflects the significance of these issues to the interests of investors. In light of regulatory and legislative developments related to human rights due diligence, this interest in reporting on social-related issues is set to continue increasing at a rapid rate.

Shift therefore strongly endorses the need for the ISSB to include within its near-term agenda research work that would lead towards a standard on social-related financial disclosures.

This submission to the ISSB’s public consultation sets out the key challenges with addressing social issues through its proposed approach, including the  difficulties arising from its proposed categorization of ‘human capital’ and ‘human rights’. It proposes an alternative approach that would focus instead on the development of a cross-cutting social standard that would align with the ISSB’s stated objectives by:

  • encompassing issues relevant to both human capital and human rights, avoiding any need to draw boundaries between them, and without needing to address the specific topics they cover in detail,
  • meeting the most essential needs of the providers of capital regarding material social-related issues by enabling them to assess the extent to which any company is equipped in its core governance, strategy and risk management to identify and manage social-related risks in its operations and value chains
  • establishing the global, foundational building blocks for reporting on social issues, following much the same approach as the ISSB Climate standard S2: mirroring the structure of standard S1 on General Requirements, but extending beyond its content by addressing significant factors particular to social-related issues
  • being coherent and interoperable with the existing European Sustainability Reporting Standards (ESRS) on social issues, including by providing a common understanding of the relevant architecture of social-related topics in sustainability reporting
  • providing a resource-efficient project that the ISSB could reasonably undertake in its immediate work plan, being (a) broader but less granular than either of the two proposed projects, (b) able to leverage substantial existing resources including the international standards on human rights due diligence and the ISSB’s own CDSB Framework for Reporting Environmental and Social Information.

The submission sets out the detailed rationale for this approach, the benefits it would bring and the resources on which it could draw.

Understanding business impacts on people: the complementary approaches of ‘business and human rights’ and ‘social and human capital’

The fields of ‘business and human rights’ and ‘human and social capital’ address the management and measurement of business impacts on people – but there is often confusion about where these approaches overlap and where they diverge.

This is partially due to their distinct starting points: the field of ‘business and human rights’ is founded on the proposition that all companies have a responsibility to respect the human rights of people affected by their operations, products and services – this is articulated in the UN Guiding Principles on Business and Human Rights and reflected in a range of other standards. The field of ‘Social and human capital’ is part of the ‘capitals approach’ to decision-making which is grounded in the principle that natural capital, social capital, human capital and produced capital form the foundation of human wellbeing and economic success. By understanding how they impact and depend on the capitals, companies are supported to make holistic decisions that create value for nature, people and society alongside businesses and the economy.

In this paper, Shift and the Capitals Coalition set out the key similarities and differences between the two approaches and outline how they can be applied together to inform business decision-making. This includes a closer look at terminology, outcomes and impacts, and their shared focus on people.

Putting the European Sustainability Reporting Standards into Practice

Shift’s Guidance on the European Sustainability Reporting Standards

Primers for practitioners

7 resources

Shift’s series of primers on the European Sustainability Reporting Standards (ESRS) is for everyone and anyone tasked with putting the standards into practice – whether you’re working within a company, or advising one. The Standards are designed to ensure greater rigor, completeness and comparability in companies’ reporting on their sustainability performance across environmental (including climate), social (primarily human rights) and governance issues, in line with the EU’s Corporate Sustainability Reporting Directive (CSRD). We hope this series supports the coherent interpretation and robust implementation of the standards that will unlock high-quality reporting on sustainability.

As a ‘co-construction’ partner in the early development of the ESRS, and with our Director of Business Engagement, David Vermijs, sitting on the Sustainability Reporting Board (EFRAG) that guided the process, we are glad to be able to help demystify the standards for practitioners.

The need for guidance

The ESRS are set to apply to more than 50,000 companies in the EU and at least 10,000 companies outside. To say the advent of the standards has generated a flurry of activity would be an understatement; companies are now bringing together parts of their organizations that rarely met before – finance and internal audit, compliance and legal, environmental teams and human rights specialists. There are questions about who should lead and whether and how these different experts might work together to apply the standards. And many companies are spending significant amounts of money on hiring consultants to guide them through the process.

So it’s understandable that we’re already seeing a proliferation of interpretations of the standards. The ESRS are hardly drafted in the most accessible terms – indeed, it seems to be the fate of many reporting (and other) standards, to be unhelpfully technical and complex in ways that risk undermining their actual intent.

In addition, consultants are often inclined to interpret standards in ways that best suit the methodologies they are used to applying with their clients. Selective interpretations can come into play as part of a desire to fit these advisory engagements into ‘business as usual’. Indeed, there are cases where internal company experts familiar with key aspects of the ESRS have had to correct their consultants on what they know to be faulty advice. But many more companies lack the in-house expertise to tell the difference.

Clarity is greatly needed. The European Financial Reporting Advisory Group (EFRAG), which was responsible for drafting the standards, will be developing some key guidance over the coming weeks and months; Shift team members David Vermijs and Michelle Langlois will be supporting this process, which will hopefully go some way to addressing gaps in understanding and preventing misinterpretation.

In the meantime, we hope this series of primers will help to answer some of the most frequently asked questions we hear on key aspects of the standards, with a particular focus on social issues and their connections with international standards on human rights due diligence. The series will cover: “double materiality” – and the links between impact materiality and “salient human rights issues”; the novel people-centered architecture of the Social standard; the risk-based approach to identifying material impacts in the “value chain”; and much more.

Bridging the gap between action and reporting

Why are we doing this? Because interpretation matters. It is no accident that the ESRS align closely with the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises – the international standards of conduct on corporate respect for human rights. This ensures that reporting requirements tally with international expectations of how companies identify and address risks to people in their operations and value chains.

Too often, that connection between action and reporting on sustainability has been tenuous – whether that’s because non-financial reporting has been seen by companies as a PR side-show; or because the data demanded of companies has failed to either reflect or support good management of sustainability risks and impacts. 

Sustainability reporting should be a natural extension of action – to ensure the authenticity of insights provided to shareholders and other stakeholders, and to ensure that the data being gathered is of value for internal managers. It is this relationship that turns the costs of reporting into an investment in effective risk management. If a hundred interpretations of the ESRS now emerge, that prize will be lost.

The coming months and years will be a litmus test for whether the ESRS can re-solidify this relationship between action and reporting on sustainability matters, including on material social issues that have too long been ignored or downplayed. If not, this pioneering European initiative will in good part have failed. Now is the time to make sure that it succeeds. We hope that this series of primers can help you play a part in helping ensure that it does.

Indigenous Rights and Financial Institutions: Free, Prior and Informed Consent, Just Transition and Emerging Practice

Companies, civil society and the finance sector are paying increasing attention to Indigenous Peoples rights and expertise, which are critical in the context of our most pressing global agenda items: climate change and biodiversity loss. This is not least because much of the world’s biodiversity, and many of the natural resources needed for the energy transition, are located on indigenous territories. However, recent events, from the Dakota Access Pipeline protests to the Juukan Gorge disaster, demonstrate that prevailing approaches to identifying and managing the impacts of business on Indigenous Peoples are falling short. That is, businesses are failing to meet their responsibility to respect indigenous rights under international standards.

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Free, Prior and Informed Consent


Financial institutions (FIs) are critical players in the value chains associated with impacts – both positive and negative – on Indigenous People.  With the rapid scale-up of financing for transition minerals and growing awareness of the need for nature-based solutions, FIs must ensure both they and their clients understand and respect Indigenous People’s rights – which includes ensuring that clients obtain “free, prior and informed consent” (FPIC) when developing projects on indigenous lands. Without FPIC, project owners and their financiers face the prospect of conflict, reputational damage, lengthy delays and project cancellations, as well as a failure to meet international standards.


Overcoming Key Challenges to FPIC


In December 2022, Shift held a Financial Institutions Practitioners Circle (FIs Circle) on Indigenous Peoples rights. Two expert contributors, Lloyd Lipsett and Mark Podlasly, shared their insights from decades of experience working with Indigenous Peoples interfacing with development on their lands. Together, we fielded some of the burning questions financial institutions are grappling with as they finance clients with projects or value chains connected to indigenous territories:

  • What do FIs need to know when there are differing views on whether a community is “indigenous”?
  • How can FIs determine what “good” Free, Prior and Informed Consent (FPIC) processes look like?
  • What steps should FIs take when supplied with limited or poor-quality information on respect for indigenous rights by their clients?
  • How can FIs spot – and address – power imbalances between clients and Indigenous People?

This paper captures key takeaways from the session, focusing on the responsibility to obtain and maintain FPIC. This focus reflects the importance of FPIC as a process to safeguard Indigenous Peoples rights to self-determination, to participation, and to their lands, territories and resources.