Sia Partners In-House Day for Women
How the Corporate Social Due Diligence Directive shapes the supply chain and procurement for large companies
The Corporate Social Due Diligence Directive or CSDDD will require large companies to carry out due diligence on their own activities, and those of their suppliers, across their entire value chain. Additionally, companies will need to define and identify, and prevent, end or mitigate any actual or potential adverse impacts their activities may have on human rights and the environment. While the mandatory due diligence rules exclusively target large businesses with headquarters or operations within the EU, their impact will affect the entire upstream and downstream of a company's value chain, affecting suppliers, distributors, and business customers, both within, and beyond, EU borders.
On February 23rd 2022, The European Commission outlined the CSDDD for the first time. At the end of that year, on December 1st, the Council of the European Union expressed its position on the proposed CSDDD.
In July 2023, after the Commission & Council made its position known, The European Parliament suggested some adaptations to the existing amendments, paving the way for interinstitutional negotiations between the European Parliament, the European Council and the European Commission. The formal adoption of the CSDDD is not planned until 2024, and once adopted, Member States will have a two-year transition period to integrate the Directive into their national legislation and existing ESG legislation.
Companies will need to consider the following 8 points to adhere to upcoming legislation on supply chain transparency and compliance:
1. Integration of due diligence in company policy
Companies must define a comprehensive approach to due diligence, a code of conduct for all employees and subsidiaries, and a description of due diligence implementation processes.
2. Identification of current and potential adverse effects
With regards to their own operations, subsidiaries and business relationships, companies must take appropriate measures in order to identify current and potential adverse effects on the environment and human rights.
3. Prevention of potential adverse impacts
Companies will be required to invest in prevention plans, make contractual assurances with business partners and support and collaborate with SME's.
4. Take steps and implement initiatives to prevent further environmental impact
Companies must create a plan that aligns their business model and strategy with the transition to a sustainable economy, aiming to limit global warming to 1.5°C as per the Paris Agreement. The plan should evaluate the company's climate change risks and impacts, and if deemed significant, it should incorporate emission reduction goals.
5. Ending actions leading to adverse impacts
When adverse impacts are discovered by companies, they will be obliged to take corrective measures such as impact neutralization, paying damages, and implementing corrective action plans. If needed, in severe cases, companies will need to suspend or terminate commercial agreements with a party causing adverse impacts.
6. Anticipate the complaints procedure
Companies must implement procedures where customers, interest groups, suppliers, trade unions and other stakeholders can report complaints regarding human rights and environmental impacts caused by company, or business relationship, operations. A valid complaint will be considered as an adverse impact.
7. Monitor the impact of initiatives
Companies are expected to assess their own compliance with environmental measures and human rights Including the operations of business relationships across their entire value chain, to monitor the impact of preventitive or corrective measures.
8. Communicate actions and initiatives
The CSDDD directive requires companies to communicate on their environmental and human rights due diligence, adverse impacts and preventive or corrective measures taken on a yearly basis via a statement on their website.
Large companies with multiple suppliers or customers will have to cope with the multi-tiered supply chain complexity. Today, supply chains involve multiple tiers, both upstream and downstream, including a wide range of customers, subcontractors and raw material providers. Having an end-to-end visibility on the corporate sustainability practices of each and every player will be challenging, especially in industries with extensive global sourcing and contractor networks.
Some suppliers may be resistant to transparency or reluctant to disclose information about their practices, especially those located outside of the EU. This will be a challenge as there is no incentive to adhere to the EU's regulatory requirements, unless an EU-based customer, such as a global car manufacturer, has strong purchasing power. ON the contrary, non-EU customers of EU-based suppliers are expected to comply to an even lower extent with these rules. Building trust, encouraging cooperation and creating partnerships can be a significant hurdle.
Guarantee data availability and reliability
Accessing accurate and reliable data on suppliers' practices, including their labor conditions and environmental impacts, can be a challenge. Suppliers may have varying levels of data collection and reporting capabilities, making it difficult to obtain a complete picture of their operations, which will be required to obtain end-to-end visibility.
Facilitate monitoring and enforcement mechanisms
Maintaining ongoing monitoring and enforcement mechanisms to ensure suppliers' compliance with standards can be challenging. Regular follow-ups, audits, and assessments require sustained efforts and resources, especially for companies with large and geographically dispersed supply chains. A register of accredited customers and suppliers could be used to screen business partners before signing a long-term contract. An accreditation system involving a common standard and independent verification would be needed in this case. Ideally such a system would be common across industry sectors and locations.
Anticipate the 2026 regulation by adapting corporate behavior and offering reward schemes
To achieve meaningful impact, it is essential for management to be incentivized to implement environmental targets and plans. Corporate leaders have shown that a crucial step in ensuring a company's sustainability goals is linking directors' variable remuneration to sustainability performance. This incentivization encourages management to fulfill their sustainability commitments, allowing the company to reap the benefits of this sustainability. These benefits include increased profits through reduced costs, improved efficiency, and a potential expansion of market share, as consumers and investors increasingly prioritize sustainability. By proactively addressing sustainability issues throughout operations and the value chain, the company also mitigates legal, financial, and reputational risks and has a meaningful positive impact on both the community and the environment.
In the face of the forthcoming Corporate Social Due Diligence Directive (CSDDD), large companies find themselves on the verge of a transformative era, where supply chain transparency and compliance with social and climate regulations will be required. Sia Partners offers a wide range of services to achieve your company-specific objectives whilst navigating this new regulatory landscape.
With our dedicated climate practice, we have extensive experience in co-creating and implementing robust climate strategies in line with the latest regulatory updates. Part of SiaXperience, Addison guides clients in building strong ESG strategies and communications. Addison will empower your company to implement effective reporting mechanisms, enabling real-time monitoring of your ESG initiatives' impact, fostering a culture of continuous improvement.
With a thorough understanding of the CSDD Directive, Sia Partners’ HR & Change Management practice can support you in drafting an adequate human capital policy with clear guidelines on how to be compliant with human rights regulations. This policy can be included in supplier contracts which can be monitored for compliance during audits and accreditations.
Sia Partners also has a well-developed procurement practice. Thanks to our expertise in green procurement, we will develop sustainable sourcing practices that extend throughout your entire value chain, promoting ethical and eco-conscious business practices, while keeping costs under control. This involves mapping the entire supply chain, including accreditation of suppliers and subcontractors, and understanding the impact of activities throughout the supply chain. Procurement will also work with suppliers to improve their practices with regards to human rights.
Our cutting-edge data-science and AI capabilities reinforce our advisory and implementation services, leveraging innovative solutions to ensure compliance and help you become a sustainable leader in an agile manner. Blockchain technology has the potential to revolutionize supply chain management by providing a tamper-proof and transparent ledger of transactions. This ledger can be used to track the movement of raw materials, labor, and other resources throughout a supply chain, providing visibility into the provenance of products and materials. This information can then be used to verify that the products and materials are compliant with CSDDD regulations, such as those related to the protection of human rights and the environment.