Corporate Sustainability Due Diligence Directive – an opportunity to strengthen supply chain resilience

This article was written by Petra Parizkova for Corporate Citizenship - part of SLR. Corporate Citizenship provides ESG strategy, reporting, social and environmental impact and other sustainability consulting services to multi-national companies.

With the recently published EU Corporate Sustainability Due Diligence Directive (CSDDD) proposal comes a renewed interest in creating more accountability for company environmental and social impacts. Taking accountability for these is something that many larger corporations currently get away with, hence this directive designed to crack down on nagative practises. Although not coming into force for at least two more years, the CSDDD establishes obligations which will require companies to identify, prevent or at least mitigate and finally terminate adverse impacts on human rights and the environment that they, their subsidiaries and their supply chain partners are responsible for. This is all done so with the goal of improving general sustainability across larger companies. This is the first time that companies are going to have to account for these impacts in this manner and the Directive may be seen by companies as a potential risk burden.

Although many companies may see the Directive as another risk management or reporting framework, another way of viewing it will be as an opportunity to:

• develop greater engagement with suppliers and key stakeholders in the communities in which they operate and source strengthening supply chain resilience whilst identifying opportunities for innovation.
• raise standards in countries with weak regulations
• build brand trust as companies demonstrate they consider the impact they make beyond their immediate control.

Who will the Directive apply to?

• EU companies which are divided into two groupings
• Group 1: all EU limited liability companies with more than 500+ employees and turnover of EUR 150 million in the last financial year*
• Group 2: Other limited liability companies operating in defined high impact sectors, which do not meet both Group 1 thresholds, but have more than 250 employees and a net turnover of EUR 40 million worldwide and more. The ‘high’ risk sectors are defined as
• Textiles, leather, clothing, footwear and related products
• Agriculture, forestry, fisheries, food products
• Mineral resources, metal products, chemicals
• For these companies, rules will apply 2 years later than for group 1.
• Non-EU companies active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU.
• Group 1 companies need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement

What kind of action will companies need to take in relation to their supply chain to abide by the Directive?

Below are some steps that the Directive sets out for companies to ensure compliance.

Development of a Due Diligence Policy & Overseeing Implementation

The CSDDD requires the development of a due diligence policy. It is an essential requirement in order to comply with this directive. This will need to set out the company’s approach to due diligence on adverse human rights and environmental impacts for its own operations, those of its subsidiaries and the supply chain. In our experience a due diligence policy will require input from a number of internal stakeholders including Procurement, HR and Operations, as multiple areas of the business will be required to provide various documentation and processes. It will be worth considering whether there is an opportunity to bring these people together into a committee or working Group in order to simplify the process. This will also help to satisfy another key element of the Directive which is to set up and oversee the implementation of the due diligence process and integrate it into the corporate strategy. It is also important to consider how progress is incentivised and opportunities to review remuneration criteria for key internal stakeholders. This type of work can often find itself lost in amongst the extensive list of day-to-day tasks that individuals may have. Offering some kind of incentive will help to maintain progress.

Identify and Prevent Adverse Human Rights and Environmental Impacts

The Directive ensures that the company is held to account for its impact across all tiers of the supply chain, which will be a departure for companies who have historically focused on the impact of their top supply chain tiers based on spend. Companies will need to undertake deeper evaluations of the type of issues they impact across their supply chain, working with key stakeholders to identify the causes and develop solutions for tackling them. It may mean that companies consider developing more detailed human rights policies to outline obligations. To ensure that issues continue being identified, it is also important that a company has an established mechanisms whereby stakeholders can report human rights/environmental concerns.

Most companies already have in place some level of contractual obligations with their supply chain partners to ensure certain levels of supply chain standards are maintained but this will need to be reviewed in light of the breadth of issues that the new Directive brings in. The annexe to the CSDDD lists over 55 international and European treaties, laws and conventions that need to be considered on a broad range of topics from child labour and rights of indigenous people to biodiversity and waste. Companies will also need to think about how supplier compliance is audited and whether all of the supply chain has the resources to be able to comply with new standards. It may be that companies will need to put budget aside to support their smaller (SME) suppliers.

Prevent

If areas are identified where there is real potential risk, it is important that a preventative action plan is developed with affected stakeholders. Working with key stakeholders can create more innovative and constructive action plans as well as a deeper level of understanding than just relying on data platforms to provide general trends which do not take account of situational context.

Mitigate and Terminate Adverse Impacts

Where adverse impacts are taking place, companies will be required to minimise or even stop activity, depending on the issue and the level of severity the impact they are making through the supply chain. This will once again require understanding the issues and collaborating with key stakeholders to identify the solutions. If suppliers do not comply with standards and mitigation plans then companies need to consider also how to terminate their business relationship and seek compensation/damage from the suppliers to the affected stakeholder groups.

Reporting

Companies will be required to report year-on-year progress on their due diligence approach and the effectiveness of the measures in place. This will require working closely with the supply chain and key stakeholders to build trust and transparency in reporting.

Resources

Corporate sustainability due diligence | European Commission (europa.eu)

Questions and Answers: Just and sustainable economy (europa.eu)

Proposal for a Directive on corporate sustainability due diligence and annex | European Commission (europa.eu)