Proposed law aims to reshape logistics and procurement, triggering global impact and debate
By: David Bland
“The CSDD opens a transformative era for all businesses, direct selling included, with acute implications for companies with complex supply chains… Preparedness is paramount.” —Laure Alexandre, Executive Director, SELDIA
The European Union (EU) is preparing to enforce a groundbreaking supply chain law that aims to revolutionize logistics and procurement operations across the continent. The Corporate Sustainability Due Diligence Directive (CSDD), also called the European Supply Chain Act, seeks to hold companies accountable for their impact on human rights and the environment, not only within their own operations but also within their supply and value chains.
While some member EU countries such as Germany, Austria, France, and the Netherlands have existing supply chain due diligence initiatives, the European Supply Chain Act seeks to harmonize the way companies interact with suppliers and subsidiaries as well as integrate more robust obligations for companies to identify and reduce the adverse effects of their operations on human rights and the environment. By establishing a benchmark of legal certainty within the transnational supply chain, the EU seeks to level the playing field for Member States.
Companies Affected by New Law
First proposed by the European Commission in February 2022, the CSDD was amended by EU Parliament in June 2023 to include two groups of companies as well as “third-country” companies that are active in the EU.
Group 1: Companies with over 500 employees and a net worldwide turnover of €150 million (euros) or more.
Group 2: Companies in high-impact sectors with more than 250 employees and a net worldwide turnover of €40 million (euros). High-impact sectors include areas such as textiles, clothing, agriculture, food and beverage production, mineral extraction, and basic metal products. This group will have an additional two years to comply with the law.
Non-EU companies that are active in the EU will be subject to the new law if their EU-market revenues are aligned with Groups 1 or 2.
Due Diligence Obligations
In an effort to lessen the impact of the new fees, due diligence, as detailed in the proposal, will need to be in place for both upstream as well as downstream chains of activity. The upstream chain includes the processes and suppliers involved in the manufacturing of the product, including sourcing raw materials, transportation of the materials, and all of the manufacturing processes. The downstream chain refers to the post-manufacturing activities involved in distributing the product to the end consumer. Downstream activities include marketing, warehousing, order fulfillment, customer service and product delivery.
The new law will require Member States to ensure that companies integrate due diligence into their policies and procedures. This will include the following actions:
- Identifying potential or actual human rights and environmental impacts in their operations.
- Preventing or mitigating potential impacts.
- Ending or minimizing actual impacts.
- Establishing a protocol to submit complaints to the company involving concerns about potential or actual adverse impacts, including the company’s value chain.
- Monitoring the implementation and effectiveness of their due diligence measures.
- Communicating publicly on their due diligence.
Compliance with Paris Agreement
To effectively combat climate change, companies are urged to devise a plan that aligns their business model and strategy with the transition to a sustainable economy and the goal of limiting global warming to 1.5 degrees Celsius, in accordance with the Paris Agreement.
Companies in Group 1 with an annual turnover of €150 million (euros) must set out their action plans to be in line with the Paris Agreement. If climate change is identified as a significant risk or impact of a company’s operations, the company should incorporate emissions reduction goals into its plan.
The proposed law also suggests that companies consider the successful implementation of the emissions reduction plan into the financial incentives and remuneration of its directors. This is particularly relevant if a director’s variable remuneration is tied to their contribution to the company’s business strategy, long-term interests and sustainability.
The proposed directive has established a mechanism for Member States to enforce fines and sanctions for non-compliance with the obligations set out in the proposal. These sanctions are intended to be “effective, proportionate and dissuasive” and may include financial penalties based on a company’s turnover.
The rules on corporate sustainability due diligence will be enforced through administrative supervision by Member States’ designated authorities, which will be authorized to supervise and impose these sanctions, including fines and compliance orders. Non-compliant companies could also be subject to civil liability.
In an April 2023 press release, Members of the European Parliament (MEPs) called for non-compliant companies to be fined at least 5% of their net worldwide turnover. Furthermore, they called for a ban on public procurement for non-compliant third-country companies.
Laure Alexandre, executive director of the European Direct Selling Association (SELDIA), urges all direct selling companies with operations in the EU to pay close attention to this proposed law.
“The European Union has set the regulatory pace globally on data and privacy with GDPR, digital regulation with the Digital Services Act and the Digital Markets Act, and is now adopting sustainability regulatory frameworks that will have global implications,” Alexandre says.
“Strategically, direct selling companies should not only keep a close eye on what is happening in the US and with the FTC, but also on what is happening in Brussels. Only one Direct selling company currently has an office in Brussels staffed with regulatory and government affairs experts. The Seldia team is just 2.5 FTE (full-time employees). The sector should not be blindsided by what is happening in the European Union.”
“The Corporate Sustainability Due Diligence Directive opens a transformative era for all businesses, direct selling included, with acute implications for companies with complex supply chains,” Alexandre says. “This regulatory framework compels companies to proactively assess and address risks and social and environmental impacts across their intricate networks of suppliers and distributors. We have alerted Seldia members to it throughout the policy negotiation process. Preparedness is paramount.”
Pushback Highlights Concerns Over Loopholes and Extraterritorial Impact
The CSDD has encountered criticism with one major point of contention being its exclusion of the financial sector. Critics argue that this omission creates potential loopholes and could undermine the directive’s effectiveness.
Another source of concern revolves around the CSDD’s extraterritorial impact, particularly on American companies. Under the directive’s provisions, companies are obligated to monitor adverse human rights and environmental impacts not only within their operations and subsidiaries but also across entities within their value chain and those with which they have established business relationships, regardless of their location of incorporation.
This has sparked concerns about the potential influence of the ‘Brussels effect,’ which refers to the idea that European Union regulations and standards can unilaterally shape global business practices and policies.
Additionally, apprehensions have arisen regarding the implications of the CSDD for U.S. companies, considering the liability framework applicable to their directors and the frequency of derivative lawsuits in the United States. The directive has the potential to affect various categories of U.S. companies, including those with substantial business ties to the European Union.
Timeline for Finalization
The June 2023 approval of the draft proposal by the EU Parliament paves the way for negotiations with EU Member States. The main points of contention during these negotiations are expected to be the scope of the new regulations and the timeline for their enforcement.
Depending on the outcome of these negotiations, it’s conceivable that companies could be required to comply with the due diligence obligations as early as 2025.
As companies around the world await its implementation, the CSDD serves as a potent reminder of the power of EU legislation in driving corporate sustainability and social responsibility on a global level.