EU takes important step on supply chain due diligence

A number of European countries have legislation in place or under consideration requiring companies to perform supply chain due diligence. These rules vary widely in regard to exactly what they require and what companies they apply to. National governments and EU-based companies have called for European legislation to harmonise these due diligence rules, and in response the European Commission adopted a proposed EU Corporate Sustainability Due Diligence Directive (CSDDD) in February 2022. The European Parliament and the European Council adopted draft versions of the CSDDD, and entered into negotiations on a final Directive starting in June 2023.

In December 2023, the Council and Parliament announced that they had reached political agreement on the CSDDD.

Under the final version of the Directive, companies must identify, prevent, mitigate, put an end to, and account for any negative human rights and environmental impacts in the company’s own operations, their subsidiaries and their value chains. They must integrate this due diligence into their corporate policies, and must establish and maintain a procedure for notifications and complaints about violations. Companies must further monitor and make public disclosures regarding the effectiveness of their due diligence policies and measures. In addition, certain large companies must have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Climate Accords.

The CSDDD also introduces duties for the directors of the companies covered. These duties include setting up and overseeing the implementation of the due diligence processes and integrating due diligence into the corporate strategy.

These obligations are in addition to the Corporate Sustainability Reporting Directive (CSRD), which went into effect in 2023 and requires public reporting on many of the above issues.

There was much discussion during the development of the CSDDD as to what the criteria would be for determining what companies would fall within its scope. In the end, the Council and Parliament determined that the Directive would apply to:

• EU companies with more than 500 employees and global turnover of more than EUR 150 million;
• EU companies in certain ‘high impact’ sectors (e.g. forestry, textiles, and mineral extraction) with more than 250 employees and global turnover of more than EUR 40 million; and
• Non-EU companies whose operations within the EU fall within the above thresholds.

In a controversial compromise, the financial sector is at least temporarily excluded from the supply chain due diligence rules under the agreement reached between the Council and Parliament. However, that exclusion is subject to review in the future, and the financial sector is not exempted from the requirement to align their businesses with climate goals.

As with other EU Directives, the CSDDD leaves enforcement up to the individual Member States. Each Member State will be responsible to set up a regulatory authority to oversee compliance with the Directive, establish penalties, and enforce those penalties.

The CSDDD further provides that victims may seek compensation for damages suffered as a result of a company’s failure to comply with the due diligence rules.

Now that political agreement has been reached, the next step will be formal adoption by Parliament and publication in the Official Journal. Member states will then have two years to transpose the CSDDD into national law. Realistically, this likely means implementation starting in 2025.

While the CSDDD’s rules will not take effect for at least several more months, it takes time for companies to formulate and implement due diligence policies and procedures. Now that the CSDDD is in final form, employers should review its requirements and begin aligning their internal policies with it.