EU Parliament approves supply chain due diligence directive, kicking off a wake-up call for companies

In a much-anticipated move since its draft proposal last year, the European Union Parliament approved the Corporate Sustainability Due Diligence Directive (CSDDD) on Thursday, which will require EU companies and those operating in the EU to implement more stringent due diligence.

CSDDD is part of a string of recent EU legislation aimed at supply chains applying further due diligence, such as the deforestation regulation, conflict mineral regulation and the draft regulation prohibiting products made with forced labour.

The directive will require companies to implement practices to mitigate human rights violations and negative environmental impacts from their operations. The CSDDD closely aligns with the Corporate Sustainability Reporting Directive (CSRD) which went into effect this year. The European Commission said the core elements of this directive are “identifying, bringing to an end, preventing, mitigating and accounting for negative human rights and environmental impacts in the company’s own operations, their subsidiaries and their value chains,” adding that certain large companies will also need to ensure alignment with Paris Agreement guidelines.

The directive will cover broadly:

• Integrating due diligence into policies and management systems
• Identifying risks and conducting risk management
• Having a grievance mechanism
• Monitoring the effectiveness of due diligence measures
• Generating an annual report considering due diligence efforts and targets

What separates this directive from past supply chain legislation?

The EU’s new directive is one of the few to cover both human rights and environmental impact from value chains and takes a step further than previous reporting requirements by mandating companies demonstrate their risk mitigation strategies.

CSDDD will introduce “duties for directors” of the EU companies in scope. “These duties include setting up and overseeing the implementation of the due diligence processes and integrating due diligence into the corporate strategy,” the EU said, adding, “when fulfilling their duty to act in the best interest of the company, directors must take into account the human rights, climate change and environmental consequences of their decisions.”

The CSDDD will apply to:

• EU companies with more than 500 employees and a global turnover of €150 million+
• Non-EU companies that generated turnover of €150 million+ in the EU market
• EU companies with more than 250 employees and a global turnover of €40 million+, with 50% generated in a high risk sector
• Non-EU companies that generated turnover greater than €40 million in the EU market, with 50% generated in a high risk sector

Companies found in violation of the new regulation will be subject to sanctions, including fines and compliance orders, and victims impacted by any malpractices will be owed compensation.

Following Parliament’s approval, EU states will hold negotiations later this month for final implementation. While the directive is not expected to go into effect for companies until at least 2025, companies should start preparing now to stay ahead of the requirements.

How can you prepare?

• Map out CSDDD requirements and capacity to manage obligations
• Review and/or implement a responsible sourcing management system aligned with CSDDD requirements and monitor progress with a robust monitoring system
• Implement the use of robust data and analytics to meet the more stringent conditions and to enhance near-real time supply chain monitoring of supply chain operations. Develop and report against targets and metrics, for both mitigating any potential human rights as well as environmental risks.

Contact us to find out more about how we can support you through the end-to-end process to stay ahead of the directive’s implementation.

These blogs are written by ELEVATE staff members or associates and the views and opinions expressed are not necessarily those of ELEVATE.