After lengthy delays and unprecedented political turbulence, a new era of mandatory supply chain due diligence has finally arrived. The EU Parliament approved the revised version of the Corporate Sustainability Due Diligence Directive (CSDDD) on April 24. Much has been made about the compromises required to get to this point. However, the directive still represents the most important legislative step taken toward transforming global value chains into a force for social and environmental good. Companies will have to identify a broad spectrum of sustainability risks and impacts throughout their value chains – well beyond Tier 1 – and collaborate closely with their partners to mitigate and prevent them.
Here we explore some of its groundbreaking aspects and what they mean for both in-scope companies and those that will have to respond to their trading partners’ demands. We also highlight the opportunities that a proactive approach to compliance can offer and some of the key EcoVadis solutions that can help you prepare for this new era of due diligence.
Three groundbreaking aspects of the CSDDD
1) Its reach across global value chains will be immense: Roughly 5,500 EU-based companies will be directly in scope, with the first batch required to comply from 2027 (more on scope and implementation timelines here). At least 1,000 non-EU companies with significant business in the bloc – primarily from the US, Canada, UK, Australia and Japan – are estimated to be directly captured by the directive.
These large multinationals and their subsidiaries collectively represent a massive slice of global value chains. As companies prepare for compliance, they will increasingly pressure their suppliers to provide better sustainability data and act on risks or issues uncovered. This demand for greater transparency and accountability will inevitably cascade into deeper tiers and across regions – exponentially scaling the number of companies required to rethink how they approach sustainability in their own operations and value chains. CSDDD also goes beyond the upstream supply chain: It requires in-scope companies to conduct due diligence on some downstream partners, such as those involved in transportation or distribution on the company’s behalf.
2) It requires procurement and sustainability teams to develop a holistic approach to due diligence across environment/climate and human rights: Built on the United Nations Guiding Principles of Business and Human Rights and OECD guidelines for multinational companies, CSDDD covers a broad range of social and environmental topics. Like many of the national due diligence laws that have emerged in Europe in recent years, it emphasizes human rights challenges such as eliminating modern slavery, protecting labor rights and providing safe working conditions. However, it is unique in how much it also focuses on environmental challenges – from taking action on climate change to reducing biodiversity loss. This holistic approach to due diligence will likely challenge even companies that have already developed a foundation for compliance with laws like Germany’s LkSG.
The CSDDD’s climate change component will be particularly challenging for companies. Under Article 15 of the directive, companies must develop a climate transition plan showing how they are setting their business on a 1.5ºC-aligned pathway that will enable them to achieve net zero by 2050. These plans must include time-bound, science-based emissions targets and a description of progress made toward them.
3) The directive has real teeth in the form of fines and exposure to civil liability: CSDDD raises the compliance stakes. Companies that fail to comply could be subject to public naming and shaming, removal of products from market and fines of up to 5% of their global net turnover. The directive also provides for civil liability, giving affected stakeholders around the world recourse in European courts if in-scope companies are found to have been negligent in their due diligence efforts. This aspect of CSDDD will help harmonize the inconsistent civil liability regime that currently exists in the EU for value chain impacts as, for example, France’s Duty of Care law provides access to it while the LkSG does not.
Just getting started or looking to accelerate your due diligence efforts? A proactive approach can unlock value beyond compliance
With both the CSDDD and its companion law the Corporate Sustainability Reporting Directive on the horizon, this is a daunting time for many procurement, sustainability and compliance teams. However, those reframing obligation as opportunity are not only building the foundation for compliance but are already beginning to realize a number of benefits. Companies taking a proactive approach to identifying and addressing sustainability risks and impacts throughout their value chain are building resilience, enhancing supplier relationships, reducing their cost of capital and unlocking new opportunities for innovation (learn more in our latest Sustainable Procurement Barometer report produced with Accenture). Those not yet in-scope of CSDDD have just as much value to gain and can get ahead of regulations as they expand and become increasingly stringent over time.
Here are three steps you will need to take to start preparing for CSDDD compliance or respond to your customers’ requests for greater sustainability transparency and accountability.
This is just a glimpse into how EcoVadis can help you prepare for compliance and unlock greater value in the process. For more information, stay tuned for our new CSDDD whitepaper, register for our upcoming webinar or book a demo here.
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