Planned EU Supply Chain Act (CSDDD): What affected companies should prepare for

The planned EU Corporate Sustainability Due Diligence Directive (CSDDD) is intended to help reduce environmental decay and human rights violations in the globalized economy. On June 1, 2023, the EU Parliament agreed on a position for the directive that in some aspects goes significantly beyond the German Supply Chain Act. If the CSDDD is adopted, all EU member states will be obliged to transpose it into national laws and to improve existing provisions. So, who is affected by the so-called EU Supply Chain Act, what does it contain and how can companies be supported in its implementation?

Content:

1. EU Supply Chain Act – Who is affected?
2. What are the obligations for companies?
3. When could the CSDD Directive be adopted?
4. Digital platforms support compliance with the new directive
5. Conclusion: EU Supply Chain Act – Meeting obligations and seizing opportunities

1. EU Supply Chain Act – Who is affected?

The planned EU Supply Chain Act (CSDDD) is based on a proposal by the European Commission. It is to take effect under certain conditions for companies with 250 or more employees. The requirements apply not only to the company’s own business area, but also to direct and indirect suppliers, depending on the size of the company, its ability to exert influence and the expected impact. The following organizations are affected:

• All EU-based companies with more than 250 employees and a worldwide turnover of more than 40 million euros,
• Parent companies with more than 500 employees and worldwide sales of more than 150 million euros, and
• Non-EU companies with worldwide sales of more than 150 million euros, of which at least 40 million euros were generated in the EU.

SMEs will also be indirectly affected as part of supply chains of obligated companies. The impact this could have is illustrated by the Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains (LksG), which has already been introduced and initially applies to companies with 3,000 or more employees. According to surveys, a cascade effect occurs: requirements are passed on by large companies to their suppliers and smaller partner companies. However, the latter often lack the necessary structures as well as human and financial resources to provide the required information. According to a recent survey conducted by the DIHK, 41 percent of the companies polled with fewer than 250 employees said they had already been contacted about their human rights and environmental risks. Companies of all sizes are therefore well advised to address the possible provision of relevant data at an early stage.

2. What are the obligations for companies?

The planned CSDDD directive focuses above all on human rights and environmental due diligence obligations. These include the identification, assessment, mitigation, prevention or termination of existing or potential risks and disruptions that have a negative impact on the observance of human rights or environmental protection aspects – not only in the company’s own operations, but also in subsidiaries and along the entire value chain. The aim of the EU Supply Chain Act is to promote a fair and sustainable global economy.

Apart from the identification of actual as well as potential negative impacts on human rights and environmental protection, the following steps are also considered mandatory under the draft CSDDD:

• the integration of due diligence into corporate policies and management systems
• The establishment of complaints procedures so that companies can promptly respond to possible human rights violations or environmental damage in their supply chain
• Providing reporting on sustainability efforts and due diligence, as well as statements on the implementation of measures, including an annual report
• the monitoring and evaluation of the effectiveness of the measures
• the obligation of the supervisory and administrative boards to ensure compliance and to obtain appropriate information from management

In addition, companies with annual sales of more than 150 million euros are to provide information with a transformation plan on the measures they intend to take to contribute to the emission reduction targets of the Paris Climate Agreement.

3. When could the CSDD Directive be adopted and become binding?

Following the European Commission’s proposal in February 2022, the European Council’s decision in December 2022 and most recently the EU Parliament’s agreement on a position in June 2023, the path is clear for the start of the so-called trilogue negotiations. The directive can be adopted if the EU Parliament agrees on a common position with the Council of Ministers. Although it is still unclear how and when the CSDDD will apply, the companies affected can probably expect an implementation period of several years.

However, many required measures will become relevant much earlier, as the planned EU Supply Chain Act correlates in terms of the European Green Deal with other regulatory measures that are also intended to drive the transition to a sustainable economy. Sustainable Finance, for example is intended to create the basis for a sustainable EU-wide financial system. Also, the Corporate Sustainability Reporting Directive (CSRD), which has already been adopted, will oblige many companies to publish a detailed report on their sustainability efforts, which must be prepared in accordance with binding standards. So how can companies meet the increasing requirements?

4. Digital platforms support compliance with the directive

On the way to more operational sustainability, companies should take a close look at their own supply chain and continuously review it for optimization potential. Strategic supply chain processes are extremely significant for compliance with legal regulations such as the LksG, the CSRD or the planned EU Supply Chain Act. Digital technologies can play a decisive role in achieving sustainability goals, as they have a major impact on the potential net CO2 emissions savings.

Transparency is the key factor for a successful implementation of the EU Supply Chain Act: Those who have a detailed overview of their own supply chain processes as well as their supplier network can prevent and act. Defined criteria and precise assessment tools through holistic SCM including risk management serve as a reliable basis for analyzing existing supplier relationships, optimizing processes, and meeting requirements in terms of compliance with human rights and environmental protection.

5. Conclusion: EU Supply Chain Act: Meeting obligations and seizing opportunities

Compliance with the standards of the planned EU Supply Chain Act offers companies the opportunity to position themselves as sustainable companies and to meet the generally growing green awareness. A responsible supply chain with a technology-based SCM strengthens a company’s future and competitiveness – especially in view of the increasing pressure and expectation from customers, regulators and the public. Companies benefit in several ways, as further advantages arise from the increased use of data and newly gained transparency: Logistics managers are thus able to identify hidden cost and optimization potential along the supply chain for the benefit of greater efficiency and to increase the resilience of the company.