Laws like the German Supply Chain Act (LkSG) and the recently approved EU Corporate Sustainability Due Diligence Directive (CSDDD) now mandate responsible business conduct, urging companies to scrutinize their supply chains more closely.
A game-changing development, the CSDDD represents a leap forward in driving responsible business practices and supply chain due diligence.
The EU directive will progressively impact around 5,400 companies once a final threshold of a minimum of 1,000 employees and a global turnover exceeding €450 million is applied.
CSDDD Isn't the Only Law Pushing Due Diligence
Despite being a scaled-down version of its original proposal, there is a strong expectation that the new EU directive will drive meaningful change in business practices across global supply chains, helping significantly reduce environmental and human rights transgressions worldwide. Modern slavery continues to escalate across supply chains, all the while environmental impacts poise to cost global companies $120 billion in the next two years.
Different jurisdictions have different approaches to solving these issues. Europe, however, has been effectively creating a legislation sandbox for other regions to watch and learn from: France implemented the Duty of Care Law in 2017, and the Norway Transparency Act took effect in 2022. Germany introduced the LkSG shortly after.
Outside Europe, Australia, Canada and the US took decisive steps toward mandatory supply chain diligence. Japan, in a first for its region, published guidelines to help companies prevent human rights violations in supply chains, though labor issues dominated the coverage of these initiatives.
Most Executives Say Their Suppliers Aren't Ready
Still — the scope of the CSDDD, its extraterritorial application, and the introduction of civil liability provisions bring sustainability due diligence obligations to new heights, potentially benefiting millions of rightsholders in global value chains. And the directive’s implications throughout the supply chain will be significant.
However, C-suite leaders believe that most of their suppliers will not meet the CSDDD requirements in the next two years, a survey by DWF warns. Half of the respondents are also convinced that most companies will not comply by 2030.
At the same time, 63 percent say their organization needs help understanding how to apply the CSDDD requirements.
Given the apparent lack of clarity, how the due diligence obligations interplay with reporting requirements under the CSRD (Corporate Sustainability Reporting Directive), and the size of fines for getting it wrong, there's a pressing need for more support around compliance.
How to Prepare
Most companies must manage the risks and impacts of value chains across all supplier tiers. This represents a significant shift from previous due diligence legislation and how most corporate sustainability or procurement teams operate.
The CSDDD will become effective two years after its likely publication later this year, starting with the largest companies with more than 5,000 employees and giving smaller ones time to comply, however, we expect companies already upskilling on their due diligence even before the final application of the law.
Here are four significant steps companies should be ready to make in response:
1. Risk mapping and identification
Analyze your operations and supply chain for human rights and environmental risks. Some laws, including the Norway Transparency Act, require companies to assess risks across their operations and the entire upstream value chain.
2. Risk verification
Conduct due diligence at the supplier level to verify identified risks. To comply with LkSG, companies must evaluate suppliers once they find any issues during the mapping process.
3. Risk mitigation and prevention
Fix risks by taking corrective measures to prevent problems from reoccurring. Preventing adverse impacts is the primary goal of the CSDDD, and the more severe the harm, the more robust the measures need to be.
4. Monitoring and reporting
Continue checking if your due diligence measures are working, adjust as needed, and be transparent about your actions. The CSDDD asks companies to evaluate their approach and regularly publicize their due diligence strategies.
Let's Talk!
EcoVadis is committed to supporting companies of all sizes and industries on their supply chain due diligence. We've been making exciting changes to our solutions to streamline further supply partners' engagement in assessments and improvement actions, helping companies prepare for incoming regulation.
Contact us today, or visit our our solutions pages.
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