Introduction

This time, we will explain about environmental due diligence (hereinafter referred to as "environmental DD").
As the global environmental crisis worsens, companies are being asked to take on more responsibility than simply complying with the law.
With the coming into force of the EU Corporate Sustainability Due Diligence Directive (hereinafter referred to as "CSDDD") and the mandatory disclosure of sustainability information under the CSRD, it has become essential for companies to address environmental risks within their own companies and across their entire value chains and to carry out effective environmental due diligence.

In this situation, on April 28, 2025, the Ministry of the Environment published the " Summary of Discussions of the Roundtable to Promote Environmental Due Diligence Responses by Japanese Companies ."
This time, we will consider environmental DD based on this content.

What is Environmental DD?

First, let me explain what environmental DD is.
Environmental due diligence refers to a series of ongoing processes whereby a company identifies and assesses actual or potential negative impacts on the environment in its business activities and throughout its value chain, and takes preventive and corrective measures against those impacts.
Internationally, it has been developed based on OECD guidelines and the United Nations Guiding Principles on Business and Human Rights, and is positioned as part of corporate sustainability responsibilities.

In particular, environmental DD consists of the following steps:

• Identifying risks: Identifying the impact that the activities of your company and your business partners may have on the environment
• Risk assessment: Analyzing the severity and likelihood of risk
• Preventive and corrective actions: taking action to prevent, mitigate or remedy impacts
• Monitoring and follow-up: Continuously verifying the effectiveness of response measures

The introduction of such environmental DD is now being made a legal obligation for companies under regulations such as the CSDDD in the EU and the Corporate Sustainability Reporting Directive (CSRD), making it an urgent issue for Japanese companies as well.

"Meaningful dialogue" with stakeholders in environmental due diligence: the starting point for risk identification and response

Deeply understanding the negative impacts on the environment

The direct and indirect impact that corporate activities have on the environment is often difficult to see from within the company.
This requires two-way dialogue, or "meaningful dialogue," with a wide range of stakeholders, including employees along the value chain, local residents, labor unions, and NGOs.
This will enable companies to grasp the overall picture of the impacts and respond in line with the actual environmental risks.

Prioritizing and justifying actions

Environmental DD is based on a risk-based approach, and it is necessary to set priorities for responses based on the severity of impacts and the likelihood of occurrence.
Dialogue with stakeholders is also important in this process. By incorporating external perspectives rather than relying on a company's own risk perception, effective and justifiable responses can be achieved.

A communication platform to prevent crisis situations before they occur

Building trust on a daily basis can also be a means of mitigating and resolving environmental risks through dialogue before they become social issues and are subject to litigation or sanctions.
Particularly within the EU, there is a risk that companies may be held civilly liable under the CSDDD, and pre-engagement can also serve as a form of corporate defense.

Environmental Due Diligence in Practice: Targets, Means, and Timing of Stakeholder Dialogue

Who should I interact with?

We believe that the most important thing is to have a dialogue with those (rights holders) whose human rights or the environment may be adversely affected by corporate activities.
However, when it is difficult to hold direct dialogue with all the parties involved, indirect dialogue through local NGOs, experts, and residents' groups can also be a practical and effective means.

When and how should we interact?

The CSDDD mandates five phases of dialogue:

The Importance of Information Disclosure in Environmental Due Diligence

Environmental due diligence is completed through disclosure

In environmental DD, disclosure of the entire process is considered to be an essential part of the DD, not just a reporting obligation.
It also provides an opportunity for companies to establish credibility and solicit feedback by externally demonstrating what impacts they have identified and what steps they have taken.

Integrated response to sustainability information disclosure

The EU's CSRD requires disclosure of information based on Environmental Due Diligence in sustainability reports (ESRS).
It is necessary to view double materiality assessment (an assessment methodology that considers important issues from two perspectives: the impact on a company's development, activities, position, and broader corporate value, and the environmental and social impacts of the company's activities on various stakeholders) as an integrated process and to use the results of environmental DD as the basis for risk assessment.

Co-creative relationship building: Transparency creates trust and empathy

Rather than asserting that there are "no" environmental risks, it is more important to take a disclosure stance that shows "how you will deal with the risks, assuming that they exist."
Specifically, the following examples show that Enel discloses the number of dialogues it has had with stakeholders and its methods for identifying risks, while Casino discloses who it dialogues with and the results of those dialogues.

Precedent cases that can be applied in practice

Enel (Italy)
The company has disclosed a step-by-step outline of how it engages with stakeholders to identify environmental and human rights risks.
For each identified priority risk, we systematically disclose the type of dialogue, frequency, and medium through which we engage, allowing us to operate with a high level of transparency.
For example, the report includes specific details about the number of times that dialogues on environmental risks have been held with suppliers and the number of meetings with local residents.
The report also mentions cooperation with the internal governance system as a way to ensure consistency between risk assessment and the dialogue process.

Casino Guichard-Perrachon (France)
French retail giant Casino was noted for its risk management, particularly around deforestation.
Regarding serious risks such as illegal logging and land expropriation at its suppliers, the company collects information through dialogue with NGOs and local civil society groups, and discloses the information in detail in a Universal Registration Document (URD).
In addition, the company also disclosed its efforts to review its own risk map and improve its procurement policies based on the risks that were brought to its attention.
In light of cases where companies that lacked transparency have been sued, the company is working to establish a monitoring system in collaboration with environmental NGOs, aiming to balance deeper engagement with information disclosure.

summary

Environmental due diligence is not merely about compliance on paper, but a process for reviewing the very nature of a company.
Meaningful dialogue with stakeholders and honest information disclosure will help visualize risks and justify responses, and will also be a driving force behind improving corporate value.
Japanese companies in particular will be required to respond in accordance with future global standards while making use of their existing environmental management systems and accumulated communication with local residents.