ESG Due Diligence Requirements

ESG due diligence is the ongoing process by which a company identifies, prevents, mitigates and accounts for adverse impacts on human rights and the environment connected to its own operations and its value chain. The acronym ESG stands for environmental, social and governance, the three dimensions against which a company's non-financial performance is assessed.

Unlike a one-off audit, due diligence is a continuous management cycle: a company maps where its most severe risks sit, acts to address them, tracks whether its actions work and communicates the results. It is the operational backbone of responsible business conduct and, increasingly, a legal obligation.

What ESG due diligence covers

The process spans the three ESG pillars:

• Environmental: greenhouse gas emissions, water use, pollution, waste and impacts on biodiversity.
• Social: labour conditions, occupational health and safety, human rights, and the rights of affected communities along the supply chain.
• Governance: business ethics, anti-corruption, transparency and the way sustainability is overseen at board level.

A central feature is that the scope is not limited to the company itself. Due diligence reaches into the value chain, both upstream (suppliers, raw materials) and downstream (use and end of life of products).

The legal framework in the EU after Omnibus I

In the European Union the central instrument is the Corporate Sustainability Due Diligence Directive (CSDDD), adopted in 2024. It requires large companies to embed due diligence into policy and to identify, prevent and address actual and potential adverse impacts across their value chain.

The directive was significantly amended by the Omnibus I simplification package. Directive (EU) 2026/470, published in the Official Journal on 26 February 2026 and in force since 18 March 2026, narrowed the CSDDD considerably. The obligations now apply only to the largest companies, and the two criteria are cumulative: EU companies with more than 5,000 employees and a net worldwide turnover above 1,500 million euros, and non-EU companies with more than 1,500 million euros of net turnover generated in the EU. For franchising and licensing models, the royalty threshold rises to 75 million euros. Member states must transpose the directive by 26 July 2028, and companies must comply from 26 July 2029. The package also moved due diligence away from a full chain-wide mapping towards a risk-based approach centred on direct business partners.

One change is easy to miss: Omnibus I removed the obligation to adopt and put into effect a climate transition plan aligned with the Paris Agreement, which was Article 22 of the original CSDDD. Companies that do have a transition plan still report on it, but the directive no longer requires them to have one.

ESG due diligence connects closely with the reporting rules. The Corporate Sustainability Reporting Directive (CSRD), also rescoped by Omnibus I to companies with more than 1,000 employees and over 450 million euros in net turnover, requires disclosure of how those impacts and risks are managed, with first reports covering financial years starting on or after 1 January 2027. The Sustainable Finance Disclosure Regulation (SFDR) pushes the same logic through the financial sector.

International standards companies rely on

Beyond EU law, several widely recognised frameworks shape due diligence practice:

• The UN Guiding Principles on Business and Human Rights, the foundational reference for the duty to respect human rights.
• The OECD Guidelines for Multinational Enterprises and the related OECD Due Diligence Guidance for Responsible Business Conduct.
• The Global Reporting Initiative (GRI) standards for transparent disclosure.
• The standards of the International Sustainability Standards Board (ISSB), IFRS S1 and S2.

How due diligence works in practice

A typical due diligence cycle follows several steps:

1. Embed responsible conduct into policies and management systems.
2. Identify and assess actual and potential adverse impacts, prioritising the most severe and likely risks across the value chain.
3. Act to prevent, cease or mitigate those impacts.
4. Track the effectiveness of the measures taken.
5. Communicate transparently on how impacts are addressed.
6. Remediate where the company has caused or contributed to harm.

These thresholds only decide who is legally bound. Many smaller companies run the same processes anyway, because their customers or lenders require it.

Why it matters

Robust ESG due diligence reduces legal and operational risk, strengthens relationships with investors, customers and other stakeholders, eases access to sustainable finance and supports alignment with the Sustainable Development Goals (SDGs). It also helps a company avoid greenwashing by grounding sustainability claims in verified information.

Manglai helps companies measure their carbon footprint, assess value-chain impacts and prepare their sustainability reporting in line with the CSRD and ESRS.