The European Directive on Corporate Sustainability Due Diligence (sometimes referred to as the EU supply chain law) is a proposed EU directive designed to ensure that companies pay due attention to human rights and the environment in their supply chains around the world, and requires them to mitigate or prevent their exploitation.
The directive requires companies to prevent harmful action in their supply chain across a broad range of fields, including forced labour, child labour, inadequate health and safety in the workplace, worker exploitation, greenhouse gas emissions, pollution, ecosystem destruction and biodiversity loss.
The directive aims to provide a more comprehensive, EU-wide framework for corporate due diligence toward social and environmental responsibilities. The Commission believes this is necessary as laws across EU have fragmented, resulting in individual nations focusing on singular issues, such as the Netherlands keen focus on eliminating child exploitation [1], but not addressing the broader scope of responsibilities as a whole.
Recently, however, member states have started to implement more comprehensive laws on corporate sustainability, such as France’s 2017 law on the duty of vigilance or the 2021 German Supply Chain Duty Act. There was a risk that this would make it excessively complex for businesses to comply with the various laws and maintain a level playing field across Europe. Hence, the EU brought forward the proposed directive to ensure uniformity in the single market.
The law would apply to all companies operating in the EU, with more than 500 employees and at least €150m of yearly revenue. In addition, these limits would be lower (€40m of revenue and 250 employees) for companies that derive more than half their revenue from ‘high-risk’ sectors, where the EU believes there is a higher risk of social and environmental harm.
These sectors include the textile, footwear and leather industries, mineral extraction and processing, agriculture, fishing, food processing and forestry.[2] Small and mid-size companies are not directly affected by the law, although they may be impacted as suppliers to larger companies.
The Commission estimated that around 13,000 EU companies and 4,000 non-EU companies would be impacted by the directive. The directive would impose several distinct but overlapping obligations on companies:[3]
The directive would apply to all firms in the supply chain with which an ‘established business relationship exists. The directive envisages that compliance would be enforced by the member states’ administrative authorities, with fines for non-compliance, and potential civil liabilities for violations.
Once the directive is adopted, member states would have two years to transpose the directive into national law. Smaller companies in high-impact sectors would be granted an additional two years to ensure compliance.
If you have significant revenue in Europe, you had better be well prepared. When exactly the directive will become effective is still unclear, but the fact is that demands will change. We have heard many organisations are concerned about how to manage their supply chains. It is unclear whether they have to be able to monitor compliance down to the level of producer organization or individual farm. The potential risk for ending national exportation makes the directive incredibly relevant to developing countries, who will potentially experience substantial insecurity along with their EU trading partners for years to come as adjustments are made. It is best for all stakeholders to be well prepared and start working on their supply chain transparency now.
AgUnity has a lot of experience in digitizing the supply chain from the first mile up to corporate processors and we are keen to support any company interested in a more sustainable approach. In future blog posts we will describe in more detail how we can support.
[1] EU Supply Chain Law Obliges Companies to Operate in a Fair Manner (eqs.com), EQS Group (accessed 31.08.22)
[2] European Commission Proposes New Supply Chain Due Diligence Rules for Large Companies | Environment, Land & Resources (globalelr.com), Latham & Watkins LLP (accessed 31.08.22)
[3] European Commission issues major proposal on due diligence obligations to protect human rights and the environment across supply chains | White & Case LLP (whitecase.com), White & Case LLP (accessed 31.08.22)
