Corporate sustainability due diligence: Creating a sustainable value chain with more effective human rights and environmental protection
Will current national and international legislative initiatives become the next milestone for corporate responsibility and safeguarding human rights and the environment in a globalised economy?
Corporate sustainability due diligence requires companies to address the negative impacts of their actions along their value chains and report on them.
Supply chain due diligence legislation is evolving globally
Ongoing national and EU-wide legal regulatory developments confirm the transition from “soft” standards on worker and human rights into “hard(er)” law. In past years the Conflict Minerals Regulation (2021) and the Norway Transparency Act (2021) were passed and the same is expected from the proposed Critical Raw Materials Act (planned for 2023). In addition, the German Supply Chain Due Diligence Act came into force only recently, on January 1, 2023, by which Germany has made an important leap towards more binding requirements for corporate responsibility along the value chain. Companies in all industries are aware of the increasing workload for implementation and compliance and the need to allocate more resources to it.
Common ground for the initiatives is to require companies to carry out due diligence along their value chain and to ensure they are operating responsibly by respecting both human rights and decent working conditions, among others. The proposal for the EU Corporate Sustainability Due Diligence Directive puts further emphasis on the impact of a company's value chain on the environment, notably our climate.
While some countries have already introduced national laws for due diligence (e.g. France in 2017) and some companies have promoted sustainable procurement on their own initiative, the EU sees a much greater need for improvement and for aligning national initiatives. The draft Directive, published in February 2022 by the EU Commission, is going to be adopted before the end of 2023 and will then need to be transposed into national law.
Why should companies already commit to fair and sustainable business now?
Unethical business and environmentally damaging corporate practices can lead to both human rights violations, such as exploitation of workers, and environmental risks, such as loss of biodiversity. However, it is important to understand that environmentally damaging corporate practices may also interfere with people's rights, as occurs with the rights of indigenous peoples or access to clean drinking water.
Pressure on workforce and optimisation of raw material sourcing in the past has led to controversies in the automotive, electronics and textile industry and finally lashed back on companies’ reputations and affected entire brands. Also, poor visibility of GHG emissions in the value chain may undermine a company’s corporate climate targets: According to McKinsey, a typical consumer company’s supply chain accounts for greater social and environmental costs than its own operations, creating more than 80 percent of GHG emissions and more than 90 percent of the impact on air, land, water, biodiversity, and geological resources 1 . Corporates are thus already frequently held accountable by their stakeholders for lacking mechanisms to safeguard minimum social and environmental standards along their value chain.
The EU Directive aims to create legal certainty and a level playing field for companies
The Corporate Sustainability Due Diligence Directive requires companies to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities and within their corporate governance structures on human rights and the environment. 2
The overarching goal is to build a sustainable economy on an integrated European market with more effective human rights protection while providing transparency to consumers and investors. At the same time, the aim is to prevent a fragmentation of due diligence obligations in the EU internal market and instead create equal conditions for companies and stakeholders with regard to conduct and liability. To that end, there should be improved access to redress for all those affected by human rights abuses and the environmental impacts of corporate behavior. The Directive aims at a legal enforcement of human rights and fundamental freedom conventions such as the Universal Declarations of Human Rights and the core conventions of the International Labor Organization.
- Who will be concerned by the regulation?
- How many companies will be affected?
- What are the key due diligence obligations?
- What are the protected goods and topics of concern?
- What are possible sanctions?
- How is civil liability framed?
- How often must the due diligence be performed and a report be published?
The CSDDD will concern EU limited liability companies, as well as non-EU companies that place and trade products and services into the EU market. Both are subdivided into two main groups and accounts for certain risk sectors.
Group 1 concerns companies with 500 and more employees with a €150 million or more in worldwide net turnover.
Group 2 concerns companies with 250 and more employees and a net turnover of €40 million worldwide net turnover (provided that at least EUR 20 million of this net turnover was generated in a high-risk sector).
Group 2 high risk sectors:
The manufacture of textiles, leather and related products including the wholesale trade, etc.
Agriculture, forestry, fisheries (including aquaculture), the manufacture of food products including the wholesale trade, etc.
The extraction of mineral resources, the manufacture of basic metal products, other non-metallic mineral products including the wholesale trade, etc.
SMEs are not directly in the scope of the proposed directive but may be impacted if they operate within the value chains of companies that are in scope.
First estimations expect 9,400 companies in group 1, 3,400 companies in group 2 and approximately 4,000 non-EU companies to be affected by the CSDD Directive. There are no estimations of the number of indirectly affected SMEs.
Definition of an internal responsibility and adoption of a policy statement
Regular risk analyses to identify actual or potential adverse human rights and environmental impacts
Develop measures to find potential impacts in the company's supply chain and the implementation of these measures to end or minimize actual impacts
A complaints procedure must also be established and maintained
Establishment of a risk management system to monitor the effectiveness of the due diligence policy and measures
Documentation and public reporting to communicate on the due diligence review on an annual basis
- Disposal of a land’s natural resources and means of subsistence
- Life, liberty and security
- Protection against torture or cruel, inhuman or degrading treatment
- A person’s privacy, family, home or correspondence and attacks on their reputation
- Freedom of thought, conscience and religion
- Justful and favorable conditions of work, including a fair wage, a decent living, safe and healthy working conditions and reasonable limitations on working hours
- Workers’ access to adequate housing food, clothing, water and sanitation in the workplace, if provided by the company
- Child rights and protection against child labour
- Protection against all forms of slavery, forced labor and human trafficking
- Freedom of association, assembly, organization and collective bargaining
- Equality in employment and payment
- Adequate living wage
- Safeguarding against environmental degradation causing considerable harm to people
- Protection against evicting or taking land, forests and waters securing the livelihood of a person
- Indigenous peoples’ right to land, territories and resources
- Any other behavior in breach of a duty to act which is likely to cause human rights violations
- Biological resources and biological diversity
- Import and export of endangered species of wild fauna and flora
- Production, use and handling of mercury and mercury waste
- Production, use, handling, storing and recycling of persistent organic pollutants
- Handling, collection, storing and disposal of waste
- Importation of hazardous chemicals
- Production and consumption of specific substances that deplete the ozone layer
- Exporting and importing hazardous waste
An authority will be designated to supervise and impose proportionate and dissuasive sanctions, including fines and compliance orders. A European Network of supervisory authorities will be set up to ensure a coordinated approach.
Liability arises when four conditions are met: Damage caused to a natural or legal person; a breach of the duty; the causal link between the damage and the breach of the duty; and a fault – either intentionally or by negligence.
Through the European CSDD Directive, member states must ensure that victims who suffer damages are compensated.
A report is required to be published by most subject companies yearly by April 30.
What is the expected timeline for the CSDDD?
The draft Directive was presented by the European Commission on February 23, 2022. On December 01, 2022, the European Parliament announced its position 4 and took significant tightening measures. The European Council will react and is expected to adopt more lenient requirements for due diligence in contrast to the Commission and Parliament’s proposals. Together with the European Commission both EU institutions will negotiate in the so-called “trilogue proceedings” and can then adopt the final CSDDD text in subsequent negotiations. 5
It is highly likely that the final Directive will differ from the original Commission's proposal on at least some points and stricter requirements are expected in this regard. However, it is certain that if the draft Directive is adopted before the end of 2023, it would have to be transposed into the national law of member states by 2025 and applied by the first affected companies presumably by 2027. Rules would then start to apply for the second group of affected companies two years later. Companies across Europe will be interested to what extent the experiences with the Supply Chain Due Diligence Act in Germany may also influence the negotiations at the EU level and will be incorporated into the final version of the CSDDD.
What else do companies have to take into account in anticipation of the CSDDD?
Alignment with the Paris Agreement and director´s duties
This concerns, among other aspects, the business strategy of companies, which must demonstrate compatibility with the Paris Agreement. This is accompanied by an obligation for companies’ directors to implement the CSDD Directive, and thus the establishment and monitoring of the implementation of due diligence processes, as well as the integration of due diligence into corporate strategy within the company.
Supervisory authorities in a European network
The European Commission will establish an administrative supervision network linking the designated supervisory authorities of the member states. The aim is to ensure that there is a coordinated approach between authorities for monitoring, imposing sanctions and ensuring compliance.
The scope of affected companies and consideration of the entire value chain
It is noteworthy that the CSDDD covers the entire value chain from indirect and direct suppliers to consumers and the end of life of the products through disposers. That means, the guidelines eventually also apply to smaller companies and to all those who trade in the European market, even if they are not located in Europe.
How do CSDDD and the EU Corporate Sustainability Reporting Directive (CSRD) relate and change current reporting requirements?
The new Corporate Sustainability Reporting Directive (CSRD) will allow for synergies with the CSDD Directive as both require continuous monitoring for information collection and annual reporting on progress. Many companies subject to corporate sustainability reporting will also be required to publicly report on the effectiveness of the due diligence efforts. The recently published European Sustainability Reporting Standards (ESRS) referred to by the CSRD define material issues to be reported on: They address among others social concerns of the own workforce, workers in the value chain, affected communities as well as consumers and end-users as well as comprehensive information on environmental impacts.
Furthermore, both Directives will require companies to develop a plan to ensure that the business model and strategy are compatible with the transition to a sustainable economy and with limiting global warming to 1.5 °C in line with the Paris Agreement. Last but not least, both CSDDD and CSRD make refer to the UN Guiding Principles on Business and Human Rights (UNGPs) and OECD Guidelines for Multinational Enterprises (OECD Guidelines) as fundamental frameworks for corporate responsibility.
Both Directives aim to establish more complete and transparent corporate reporting on material sustainability topics that cover not only a company’s own operations but their entire value chain. It remains to be confirmed how more stringent reporting requirements can bring about behavioral change among companies and make an actual impact on the livelihood of workers and the environment.
How AFRY can support
AFRY can support companies in demonstrating leadership in the protection of human rights and the environment along their value chain. Together with the client, we can help by aligning targets and policies with regulations and best practices, by developing strategies and roadmaps.
When it comes to social and human rights risks, they often appear in supply chains. AFRY provides consulting services from risk analyses and screenings, supplier audits and supplier capacity building to the implementation of sustainable procurement processes according to established standards.
In 2022, we performed a pre-screening of the supply chain of approximately 4,000 suppliers of a large German energy and service provider. Our work included the analysis and development of specific sector and country risk profiles and calculation within a specifically designed tool.
AFRY has also helped multiple companies in Sweden in performing supply chain audits along international value chains contributing not only to the improvement of corporate sustainability but also strengthening business relationships between customers and their suppliers. Supplier audits have been conducted e.g. for retail, packaging, and construction industries.
In addition, strong corporate social and supply chain responsibility is evidenced by external verification systems and third-party assessments. With a long track record of due diligence services, supplier audits, and social impact assessments, AFRY is experienced in providing support for reporting according to the established frameworks and anticipated regulations.
Whether you are at the beginning of your journey towards supply chain responsibility or if you are more experienced, AFRY’s international team can help you to efficiently improve your mode of operation and results.
- 1. McKinsey (2016) Starting at the source: Sustainability in supply chains (https://www.mckinsey.com/capabilities/sustainability/our-insights/start… ↩
- 2. European Commission (2022) Just and sustainable economy: Commission lays down rules for companies to respect human rights and environment in global value chains (https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1145) ↩
- 3. EUR-lex (2022) Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937 (https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52022PC0071) ↩
- 4. Council of the European Union (2022) ( https://data.consilium.europa.eu/doc/document/ST-15024-2022-REV-1/en/pdf ) ↩
- 5. Haufe.de (2023) Uneinigkeit in der EU bei Sorgfaltspflichtenrichtlinie ( https://www.haufe.de/finance/jahresabschluss-bilanzierung/eu-parlament-… ) ↩