EU governments back human rights and environmental due diligence law for supply chains

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Kimberley Botwright, Head, Sustainable Trade, World Economic Forum, Spencer Feingold, Digital Editor, World Economic Forum

• Companies in Europe will soon have to prove compliance with environmental and human rights standards within their supply chains.
• The Corporate Sustainability Due Diligence Directive demands that companies take remedial action in the case of breaches.
• The directive will not only complete the EU’s Green Deal legislation, but also align its laws with international standards for due diligence regarding human rights and corporate behaviour.

From 2029, companies in Europe will have to prove they are taking action to protect the environment and human rights throughout their supply chain.

A new legislation on supply chain audit, the Corporate Sustainability Due Diligence Directive (CSDDD), has received the backing of a majority of European governments. It is expected to be voted through by the full European Parliament following approval of a revised version by that body’s Legal Affairs Committee.

The directive is a component of the EU Green Deal and sits alongside other new rules such as the EU Corporate Sustainability Reporting Directive (CSRD), which requires sustainability reporting.

Here’s what to know about the new legislation.

What is the CSDDD?

The directive will require large companies to audit their supply chains to identify issues such as forced labour and environmental damage.

Due diligence will be critical as companies will need to demonstrate they are adhering to human rights and environmental protection across their supply chains. This includes both their own and suppliers’ operations. They will also have to show what remedial action they are taking to address any issues that arise.

Under the new legislation, companies will be required to develop preventative action plans and to get their direct business partners to contractually agree to comply with them. Once these agreements are in place, European businesses will then also have to check that their suppliers meet the requirements set out.

Which companies are affected?

Majority approval of the directive came after intense discussions around concerns the legislation would be a major “bureaucratic burden” for businesses and put European companies at a competitive disadvantage internationally, according to Reuters.

Another stumbling block was the definition of what constituted a large company. Originally, the European Commission had defined the threshold for a large company as having a net worldwide turnover of €150 million and 500 employees, but this has been revised to a net worldwide turnover of more than €450 million ($416 million) and 1,000 employees. The law will be phased in over a year, starting with companies with a turnover of €1.5 billion ($1.4 billion) and more than 5,000 employees, Reuters states.

Over time, the law will also apply to non-EU businesses with a significant turnover in the bloc.

Aligning internationally

While the initiative has been welcomed by human rights and environmental groups, some have pointed out that the latest draft of the law moves more than two-thirds of European companies out of scope. They fear that this erosion might make this seminal legislation less impactful.

However, the CSDDD will not only round off the EU’s Green Deal legislation but also align its laws with international standards for due diligence regarding human rights. These include the United Nations’ Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises, and the OECD Due Diligence Guidance for Responsible Business Conduct.

Implementation is key

For companies that will be covered by the CSDDD, identifying compliance and implementation strategies is now vital, experts say. According to the proposed legislation, each EU member state will designate a supervisory authority to check company compliance. Member states will also cooperate through a European Network of Supervisory Authorities. These bodies can launch investigations and impose non-compliant penalties – including fines of up to 5% of a company’s net worldwide turnover.

Practically, companies will need to clearly outline their due diligence policies and carry out risk assessments to prioritize the most significant human rights and environmental risks in their supply chains. These risks must then be addressed through a variety of means, including integrating codes of conduct into supplier contracts, as well as establishing a grievance mechanism. They will also have to provide a remedy in cases where they have contributed to an impact.

The extent of companies’ obligations, which has been the subject of intense wrangling in recent weeks, will be clarified in the final published text.

The CSDDD, experts note, does not specifically require supply chain traceability, but companies will need to get ready with a comprehensive understanding of their supplier practices. They must also set up pathways for supply chain visibility and procurement, establish due diligence policies (if not already in place) and train procurement and product teams, among other actions.