BlogESG - Sustainability

Green light for EU supply chain act

Written by

Ulf Narloch

Published on

Finally, the European Parliament voted for the Corporate Sustainability Due Diligence Directive. The new EU act requires companies to address human rights and environmental impacts in their value chains. An earlier draft by the Commission was much contested. The revised rules now cover fewer companies and activities.

Sustainability due diligence much debated

After tense weeks of back-and-forth, the European Parliament finally gave green light to the Corporate Sustainability Due Diligence Directive (CSDDD or also known as CS3D). This new supply chain act requires companies to address human rights and environmental risks within their own operations and of their value chains.

An earlier draft by the EU Commission from February 2022 was much contested. A provisional deal was struck between the European Parliament and Council in December 2023. Then last-minute opposition from Germany and Italy followed by other member states led to failed voting in February 2024.

Resulting from long negotiations, the text was revised in several areas. Most of all, the number of companies falling under the regulation has been lowered through higher size thresholds. Similarly, covered activities along the value chain have been reduced through narrower definitions.

CSDDD introduces a due diligence framework aligned with the United Nations Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. International standards enhance the transferability of EU regulations worldwide.

Next piece in the sustainable supply chain puzzle

CSDDD is one piece in a wider puzzle of new sustainability regulations. Several new acts require companies to bring in more transparency on sustainability considerations.

The Corporate Sustainability Reporting Directive (CSRD) requires EU companies to make their sustainability impacts transparent. Whereas the CSRD defines reporting rules, the CSDDD targets actual conduct. Both are intertwined through the sustainability standards set by CSRD on which CSDDD reporting is to be based. 

Also the EU Regulation on Deforestation-free Products (EUDR) brings new supply chain requirements. From December 2024 trading companies of wood, cattle, cocoa, soy, palm oil, coffee, rubber, and related products have to show that these products did not originate from deforested lands.

Already now, companies importing carbon-intense goods face reporting obligations under the Carbon Border Adjustment Mechanism (CBAM). While from 2026 a carbon levy will be due on these imports, for now affected companies have to measure the emissions embedded in these imports.

Which obligations result from CSDDD?

Under the directive, the covered companies are required to take better care of environmental, social and governance (ESG) considerations by addressing human rights and environmental impacts and implementing a transition plan for climate change mitigation.

Due diligence

Covered companies are required to conduct risk-based human rights and environmental due diligence for their operations across the value chain.

Value chain activities cover:

  1. Upstream activities, such as design, extraction, sourcing, manufacture, transport, storage and supply of raw materials/products/parts and development of product and services
  2. Downstream activities, such as distribution, transport, and storage.

Actions to be taken include:

  1. Integrate due diligence into company’s policies and risk management systems
  2. Identify, assess and, where needed, prioritize actual or potential adverse human rights and environmental impacts
  3. Prevent and mitigate potential adverse impacts
  4. Establish and maintain a notification mechanism and complaints procedure
  5. Monitor the effectiveness of due diligence policy and measures
  6. Publically communicate on due diligence.

Climate transition plan

Companies are also required to put in effect a transition plan to combat climate change. The contents of transition plan include:

  1. Time-bound climate targets for 2030 and in 5-years steps up to 2050, and where appropriate, reduction targets for scope 1, scope 2 and scope 3 emissions
  2. Decarbonization levers identified and key actions planned to reach targets
  3. Quantification of the investments and funding supporting the implementation of the transition plan
  4. Role of the administrative, management and supervisory bodies regarding the plan.

The plan has to be updated every 12 months and must contain a description of the progress the company has made towards achieving the set targets.

Who falls under CSDDD?

While the original proposal had a lower size threshold and included high-impact sectors with separate thresholds, the adopted text has been modified. Now, it applies to:

  1. EU companies and parent companies with 1000+ employees and global turnover exceeding €450 million;
  2. Non-EU companies and parent companies generating turnover exceeding €450 million in the Union;
  3. Franchises with a turnover of more than €80 million, with at least €22.5 million generated by royalties.

These thresholds will be phased in over 3 to 5 years. Companies not already covered by CSRD will have to communicate on their due diligence process starting January 2028 or 2029.

The financial sector is also covered but with a narrower focus, excluding reporting on downstream activities. However, additional sustainability requirements for the sector will be developed by the Commissions within 2 years of CSDDD’s enforcement.

Even though SME are not covered by the directive, they will feel its impact through their involvement in the supply chains of larger companies. It is expected that larger companies will set up systems to thoroughly scrutinize their suppliers, which will have a chain effect on smaller companies as well.

The Commission is mandated to do an assessment on the impacts of this directive on SMEs no later than 6 years after this directive comes into force.

What’s next?

After successful adoption by both the Parliament and the Council, the directive will now be published in the official journal of the European Union. It will enter into force on the twentieth day following its publication. Member States will have two years to create national legislation implementing the Directive.

EU’s two largest economies – France and Germany, already have national versions of CSDDD in place. France’s Loi sur le devoir de vigilance applies to companies with 5000+ employees, while Germany’s Lieferketten-Sorgfalts-Gesetz (LkSG)  covers companies with 1000+ employees. Both will need to be adapted to reflect the provisions in CSDDD.

Affected companies should not delay and set compliance systems in place. Non-compliance can result in civil liability and fines of up to 5% of a company’s net worldwide turnover.

(this blog is regularly updated – last update on May 24, 2024)

Sources and further information:

Photo by Mika Baumeister on Unsplash