In a significant milestone, the European Unionhas reached a provisional agreement mandating large companies operating within the bloc to proactively identify and address adverse environmental and human rights impacts within their supply chains. Lawmakers from the European Council and European Parliament dedicated extensive discussions to finalize the Corporate Sustainability Due Diligence Directive (CSDDD) during a session that spanned Wednesday and part of Thursday morning.
The CSDDD compels businesses meeting specific size and profitability criteria to confront and rectify harmful practices such as child labor, forced labor, pollution, deforestation, excessive water consumption, and ecosystem damage. As outlined in a statement by the European Parliament, companies will be required to integrate "due diligence" into their policies, risk-management systems, and code of conduct.
Corporate Accountability Across Sectors with Stringent Environmental Mandates and Regulatory Measures
Notably, even entities in the financial sector must adopt a plan ensuring that their business models align with limiting global warming to 1.5 degrees Celsius above pre-industrial levels. The directive is poised to apply to EU and parent companies with more than 500 employees and a net global turnover of 150 million euros ($163 million), as well as those with over 250 employees and a net global turnover of 40 million euros ($44 million) derived from high-risk sectors.
The CSDDD mandates companies to identify, assess, prevent, mitigate, and remedy negative impacts within their supply chains. Engagement with affected parties, the establishment of a complaints mechanism, communication of due diligence policies, and regular effectiveness monitoring are essential components, according to Members of the European Parliament (MEPs). Each member country will designate a supervisory authority to enforce compliance, conduct inspections, investigations, and impose fines of up to 5 percent of a non-compliant company’s net worldwide turnover.
Dutch MEP Lara Wolters, leading the directive, hailed it as a historic breakthrough, emphasizing corporate responsibility for potential abuses in their value chains. However, some civil society groups expressed disappointment over the limited scope of the directive, citing a "disappointingly low number" of companies subject to compliance and a temporary exemption for the financial sector in conducting due diligence.
Transformative Shift Towards Mandatory Corporate Responsibility
While acknowledging these concerns, experts see the CSDDD as a transformative step in reshaping corporate responsibility across various sectors. The directive addresses action steps beyond transparency and reporting, encouraging global brands and retailers to align sustainability, equity, and inclusion goals on a broader scale.
Despite varying opinions, the CSDDD marks a shift from voluntary standards to mandatory human rights and environmental due diligence, signaling a new era in corporate responsibility. While national rules already exist in certain countries, the CSDDD aims to establish a harmonized legal framework, providing legal certainty and a level playing field for EU businesses operating across borders and non-EU companies engaging in the EU market. The directive is anticipated to come into force in 2024 pending formal adoption by the European Council and European Parliament.
Which Companies Are Addressing Issues Within Their Supply Chains?
Nike: Nike has been involved in sustainability initiatives and has committed to eliminating hazardous chemicals from its supply chain. The company has also set targets related to reducing carbon emissions and addressing human rights issues.
Unilever: Unilever has a Sustainable Living Plan with goals related to environmental sustainability, including reducing its environmental impact and improving social conditions within its supply chain.
Patagonia: Patagonia is known for its commitment to environmental and social responsibility. The company emphasizes transparency in its supply chain and has initiatives to address fair labor practices and environmental conservation.
Adidas: Adidas has set sustainability goals, including using more sustainable materials and reducing its carbon footprint. The company has also been involved in initiatives to improve labor conditions in its supply chain.
Coca-Cola: Coca-Cola has committed to water neutrality, responsible sourcing of agricultural ingredients, and reducing its carbon footprint. The company has also been involved in efforts to address water scarcity and promote community well-being.