From 2029, companies in EU will have to demonstrate environmental and human rights protections throughout their supply chains, including supply partners.
In March, a new law on supply chain due diligence - the Corporate Sustainability Due Diligence Directive (CSDDD) - received the support of the majority of EU governments. It is expected to be voted on by the entire European Parliament after its Legal Affairs Committee approves the revised version.
The directive is part of the EU's Green Deal and sits alongside other new regulations such as the EU's Corporate Sustainability Reporting Directive (CSRD), which focuses on sustainability reporting. With this regulation, businesses that want to operate in the EU market must meet some more stringent environmental and human rights regulations.
This strategy is in line with the development trend of emerging fields such as technology, digitalization, and renewable energy. But at the same time, traditional manufacturing industries face more pressure to meet new environmental criteria.
What is CSDDD?
The directive will require large companies to conduct due diligence on their supply chains to identify issues such as forced labor and environmental damage. Due diligence will be important because companies will need to demonstrate that they are complying with human rights and environmental protection in their supply chains, including their own operations and those of their suppliers. Companies will also have to demonstrate the corrective action they are taking to resolve any issues that arise. Accordingly, companies will be required to develop preventive action plans and persuade their direct business partners to agree to comply with those plans. Once these agreements are implemented, European businesses will also have to check whether their suppliers meet the requirements set.
Which companies are affected?
According to Reuters, the majority approval of the directive comes after intense discussions around fears the law will be a major "bureaucratic burden" on businesses and put European companies at a disadvantage in international competition.
Another obstacle is determining what constitutes a large company. Initially, the European Commission defined the threshold for a large company as having a worldwide net turnover of 150 million euros and 500 employees, but this has been revised to a worldwide net turnover of more than 450 million euros ($416 million) and 1,000 employees.
Reuters said the bill, if passed, would be implemented for more than a year, starting with companies with sales of 1.5 billion euros ($1.4 billion) and more than 5,000 employees. Over time, this law will also apply to non-EU businesses with significant turnover in the bloc.
While the initiative has been welcomed by human rights and environmental groups, some have pointed out that the latest bill has excluded more than two-thirds of European companies from the scope of application. They are concerned that this erosion could make the law less effective.
However, CSDDD will not only finalize the EU's Green Deal law, but also align its law with international standards for human rights-related due diligence. These include the United Nations Guiding Principles on Business and Human Rights, the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises, and the OECD Due Diligence Guidelines on Responsible Business Conduct.
Mandatory implementation
Experts say that for companies that will fall under the scope of CSDDD, it is very important to identify the current compliance and implementation strategies. Under the proposed law, each EU member state would appoint a supervisory body to check the company's compliance. Member states will also cooperate through the European Network of Supervisory Authorities. These agencies can conduct investigations and impose penalties for non-compliance – including fines of up to 5% of the company's worldwide net revenue.
In fact, companies will need to clearly outline due diligence policies and conduct risk assessments to prioritize the most important environmental and human rights risks in their supply chains. These risks must then be addressed through a variety of measures, including the integration of codes of conduct into contracts with suppliers, as well as the establishment of a grievance mechanism. They will also have to come up with remedies in case they have contributed to the impact.
The extent of the companies' obligations, which has been the subject of intense debate in recent weeks, will be clarified in the final draft.
Experts note that CSDDD does not specifically require supply chain traceability, but companies will need to be prepared with a comprehensive understanding of their suppliers' operations. They must also establish roadmaps for tracking and procurement in the supply chain, establish due diligence policies (if not already in place), and train procurement and product teams, among other actions.
For major exporters to the EU market such as Vietnam, the new law also means increased production costs. Many textile and agricultural businesses will need to invest more in supply chain monitoring systems, or seek certifications to comply with new regulations so that they can continue to export their products to the European market.
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