Towards sustainable supply chains:  Opportunities and Obstacles to Corporate Due Diligence in the EU 

Written by: Chiara Marino
Edited by: Sibilla Gosso

Introduction 

“With these rules, we want to stand up for human rights and lead the green transition.

We need a shift in our economic model.”

Didier Reynders, Commissioner for Justice

On 23 February 2022, the European Commission (EC) adopted the directive proposal on Corporate Sustainability Due Diligence, hereinafter CSDD (European Commission, 2022). By introducing new legal obligations, the EC plans to actively change European companies’ practices towards a more sustainable and responsible corporate behaviour which includes human rights protection. In particular, this proposal targets the value chains of both EU companies and non-EU companies operating in the EU. Thus, setting duties of due diligence to the whole supply chain of companies, the CSDD directive surely represents a crucial step towards the creation of common legal standards within the European Union (EU) but more importantly beyond its borders (European Commission, 2022). Considering the significance of such topics especially in the climate crisis era, this article aims at investigating the current framework concerning this directive proposal as well as examining the potential benefits and critical points following its adoption. To do so, the first two sections are devoted to contextualising the European legal framework in the matter. Following this, the remaining part of the article focuses on the directive provisions discussing several potential obstacles and how they can be overcome. 

Where do we stand? – The European legal framework 

The word “sustainability” is unquestionably employed in many different contexts, gradually becoming the buzzword of the 21st century (de Kluiver, 2023). In particular, the European Union provides a comprehensive definition of “Sustainable development” which implies meeting “the needs of current generations without compromising the ability of future generations to meet theirs” (European Commission, 2019). Based on three pillars, economic, environmental and social, this definition proves to be quite far-reaching as it does not only focus on the environment per se but more importantly it includes human rights protection. This is indeed the definition used in the framing of the CSDD directive proposal analysed in the present article. 

Given the leading role played by large corporations in the impending climate crisis, the adoption of sustainability standards by firms has become central to mitigating the adverse effects and finding a long-term solution to such a serious problem. Looking more specifically at the EU, the concept of sustainability is enshrined in its Treaties, representing a fundamental objective for the EU’s internal and external policies (Treaty on the Functioning of the European Union, 2016). Thus, acknowledging the relevance of corporate behaviour in reaching sustainability goals, the EU institutional bodies have agreed on a new set of legislations specifically concerned with overseeing corporate practices. In particular, the EU Sustainable Finance Disclosure Regulation adopted in 2019 faced the problem of information asymmetries between companies and shareholders by requesting annual reports regarding the sustainability levels of companies’ investments (EU Regulation 2088/2019). In addition to annual reports, such information needed to be available via companies’ websites and in pre-contractual documents. In other words, the EU committed to creating a transparency framework, pushing towards green investments and ultimately making them more desirable. Considering the importance of information disclosure by companies, in January 2023, the EU Corporate Sustainability Reporting Directive set strict obligations for reports on the environmental and social impact of companies’ activities (EU Directive 2464/2022). More practically, under these rules, companies needed to report on how their business model would affect their sustainability, which includes environmental as well as social and human rights protection in line with the above-mentioned definition of sustainability. Having described the supranational legal framework which led to CSDD, it is important to account for single member states legislative initiatives in shaping EU legislation. The next section thus briefly reports some of the major national laws of EU member states related to supply chain regulation. 

A National push towards CSDD

When considering changes within the EU legal framework the initiative of single member states might play a crucial role. Indeed, having already enacted legislation addressing the issue of unsustainable supply chains, France and Germany somehow pushed for action in the broader European legislative framework. Enforced in 2017, the French “Loi de Vigilance” or Vigilance Law aims to prevent human rights abuses and environmental damage by companies (Savourey & Brabant, 2021). In practical terms and similarly to the CSDD directive discussed below, the Vigilance Law introduced measures to assess the sustainability of French companies’ value chains while creating monitoring mechanisms to supervise the effective implementation of such measures (Duty of Vigilance, 2017). Additionally, the French law contains obligations of transparency and disclosure, addressing the issue of information asymmetries. More recently, enforced in January 2023, the German Supply Chain Due Diligence Act, also known as “Lieferkettensorgfaltspflichtengesetz”, followed the French example while having implications also for Brazilian suppliers, thus, expanding the subjects falling within the scope of the law (“The New German Supply Chain Act (LKSG): Due diligence obligations for German and also Brazilian business partners”, 2023). Thus, as a continuation of both national and supra-national efforts the CSDD was advanced. The next sections will detail the CSDD measures analysing both its strengths and weaknesses. 

Supply chain management in perspective: the CSDD directive

Born to address environmental and social concerns and in line with the European Green Deal, the CSDD represents an important step towards a climate-neutral, green economy which also protects human rights (EU Directive Proposal COM(2022)71 – CSDD). The truly innovative and ambitious feature of this proposal lies in the scope of its provisions. By applying to large corporations with their cross-border value chains, CSDD’s rationale is to increase corporate accountability for adverse impacts going beyond the EU borders (Jurić et al., 2022). This feature, though surely avant-garde, poses many problems for such companies that are already subject to different provisions and need to adjust to the new set of European requirements (Jurić et al., 2022). Yet, before discussing why the extensive scope of CSDD provisions represents a considerable obstacle to its effectiveness, the following lines provide a summary of the important points concerning the directive.  

The proposed rules require companies to integrate due diligence into their policies, identify and address adverse human rights and environmental consequences (EU Directive Proposal COM(2022)71, Arts 5 to 8), establish complaint procedures (EU Directive Proposal COM(2022)71, Art. 9), and communicate their due diligence efforts (EU Directive Proposal COM(2022)71, Art. 11). Compliance entails protecting human rights and mitigating environmental harm, aligning with international conventions. As previously mentioned, this directive will apply to specific categories of companies and sectors: EU companies and non-EU companies operating in the EU. These include a first group of limited liability companies with more than 500 employees and a net turnover of 150 million euros or more – about 9,400 – and other limited liability companies in high-impact sectors which do not belong to the first group but that have more than 250 employees and 40 million euro or more in net turnover worldwide – about 3,400. Small and medium enterprises (SMEs) are exempt from this directive (Kortelainen, 2022). National authorities will supervise enforcement, imposing fines for non-compliance, while victims will have legal recourse for damages (de Kluiver, 2023). Additionally, large companies must align their business strategies with limiting global warming to 1.5°C as per the Paris Agreement (EU Directive Proposal COM(2022)71, Art. 15). 

From opportunities to potential obstacles – Evidence from the existing literature

Having listed its central provisions, it seems clear that, while displaying an innovative text, the CSDD directive shows several critical points. In particular, the following sections will focus on three main issues: the number of companies within the scope of the directive, the level of competitiveness of the concerned companies and, finally, supervision strategies. First of all, the exemption of SMEs limits the scope of the directive, leaving the sustainability challenge and human rights protection to the legislation of single member states (Jurić et al., 2022). Secondly, from a strictly economic point of view, the aforementioned provisions establish additional costs from an operational and transitional point of view. Consequently, companies’ adaption to directive requirements implies a change in their internal structure as well as in the way their goods are produced to rely on sustainable value chains. This will ultimately lead to higher production costs and an increase in prices, thus essentially hindering the level of competitiveness of EU companies (Felbermayr et al., 2021). Lastly, concerning the regulatory framework, as administrative supervision is left mainly to single member states, it is not clear whether this enforcement strategy proves to be effective. As de Kluiver (2023) argues, traditional civil liability mechanisms such as fines do not possess the characteristics to create effective regulatory supervision of sustainability policies. 

Recognising the potential weaknesses of the CSDD directive is the first step towards a better understanding of the practical consequences following its adoption. Moreover, exploring the existing literature and looking at the topic from a different perspective, there seem to be strategies to overcome some of the aforementioned obstacles. Firstly, while it is true that SMEs’ exemption from the directive restricts its scope, the precise nature of such directive entails an expansion in the scope of application on subsidiaries and suppliers of the interested companies (Jurić et al., 2022). Indeed, as specified, the directive provisions are directed also to contractors, subcontractors and suppliers of companies, thus creating a vast network of businesses affected by CSDD. Secondly, as the complexity of suppliers’ governance will surely lead to lower competitiveness for CSDD-affected companies, empirical studies show that this scenario might be confined to the very short run (Kortelainen, 2022). As Kortelainen discusses in his findings, competitiveness might improve in the long run as the business environment is expected to be more unified. Indeed, the author stresses that by levelling differences in the European business framework, the harmonising rules of the CSDD directive would reduce competition disadvantages at least within EU companies. Thus, according to Kortelainen, the main issue regards CSDD-affected companies’ competition against competitors in countries without due diligence norms. While for some authors this remains one of the most problematic points of the directive, it is worth noting that similar legislation proposals are debated in the United States and Asia, underlining the importance of setting global standards (Kortelainen, 2022). Lastly, supervision and enforcement are key when addressing corporate practices towards sustainable supply chains and human rights protection. According to de Kluiver (2023), civil liability instruments alone are not sufficient as often in the case of human rights violations it is not possible to recognise specific perpetrators or to establish a direct link between actions and damages. In addition to civil liability, the directive prescribes/requires member states to designate one Competent Supervisory Authority (CSA) whose powers are listed in general terms in Article 18 of CSDD. Indeed, as de Kluiver (2023) argues the generality of Article 18 is an advantage for the CSDD legislative framework as it allows countries that have already adopted due diligence norms to maintain their supervisory and enforcement structure, becoming a model for the others. In other words, dealing with the complexity of human rights violations and environmental damages, especially regarding liability, demands at least some level of flexibility. 

The path ahead 

Considering the serious challenges the world is facing, namely climate change, the Corporate Sustainability Due Diligence (CSDD) directive proposal proves to be key towards the green transition. Following the adoption of the CSDD directive, it seems clear that companies will need to change their internal structure to effectively develop sustainable supply chains. This article has evaluated the advantages and disadvantages of the directive provisions, specifying the potential obstacles as well as the way they might be overcome. And though many authors are sceptical towards the efficacy of new legislations like CSDD, it is worth mentioning that European companies are already dedicated to the sustainability challenge and perceive Environmental Social Governance as an integral part of the business setting (Dostalová, 2023). Indeed, sooner or later compliance with such rules will become inevitable as companies will understand the urgency of moving towards sustainable practices. As Václav Heinrich, commercial director of Titan – Multiplast, aptly summarised  “Who does not improve ceases to be good. And we know we can’t stay still” (Dostalová, 2023). 

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