The Supply Chain Act and the Corporate Sustainability Due Diligence Directive (CSDDD) are crucial regulations requiring companies to ensure sustainability and responsible management throughout the entire supply chain. These regulations mandate that businesses implement due diligence procedures to identify, prevent, and mitigate risks associated with negative impacts on human rights and the environment.
The Supply Chain Act, already in force in Germany since 2023, initially applies to companies with over 3,000 employees, extending in 2024 to those with at least 1,000 employees. This law requires businesses to conduct risk assessments on all suppliers and implement mechanisms to address any violations.
The CSDDD, approved by the EU in 2024, imposes similar due diligence obligations but with a broader and more harmonized European scope. This directive applies to companies with over 1,000 employees and a turnover exceeding 450 million euros. Businesses must ensure that their direct and indirect suppliers comply with international human rights and environmental standards. Among other requirements, the law mandates the creation of climate action plans aligned with the EU’s climate goals for 2050.
Key Aspects of the Regulations
- Mandatory Due Diligence: Companies must adopt a due diligence policy outlining their approach to managing human rights and environmental risks. This includes analyzing their own operations, subsidiaries, and business partners, covering both upstream (suppliers) and downstream (distributors) aspects.
- Application Thresholds: The obligations apply to different categories of companies based on employee numbers and turnover. For example, companies with over 5,000 employees must comply starting in 2027, while smaller firms have later deadlines.
- Preventive and Mitigation Measures: Companies must take appropriate measures to prevent or mitigate negative impacts by implementing action plans and collaborating with business partners. Continuous monitoring and the publication of annual compliance reports are also required.
- Civil Liability: EU member states must establish legal mechanisms allowing claims for damages due to regulatory violations. This means that even non-governmental organizations can act on behalf of affected parties.
Integration of European Regulations
These regulations are not isolated but are part of a broader regulatory framework aimed at strengthening corporate sustainability and transparency in Europe. Alongside the Supply Chain Act and CSDDD, other directives significantly impact supply chains.
The Corporate Sustainability Reporting Directive (CSRD) introduces more extensive reporting obligations than the previous Non-Financial Reporting Directive (NFRD). Companies with more than 250 employees or a turnover exceeding 40 million euros must provide detailed reports on their environmental, social, and governance (ESG) performance. These reports must also include supplier data, offering greater transparency on sustainable practices throughout the supply chain.
The European directive expands the due diligence concept by requiring companies to identify and address human rights and environmental risks throughout the entire supply chain, including direct and indirect suppliers. Businesses must adopt preventive and mitigation measures to prevent human rights violations and environmental damage, contributing to a more responsible and sustainable supply chain.
Finally, the EU Deforestation Regulation (EUDR) is a regulation aimed at preventing deforestation linked to global commercial activities. Companies importing goods into the EU, such as timber, palm oil, coffee, and beef, must prove that their products do not come from illegally deforested land. Businesses must implement due diligence systems that ensure traceability and sustainability of raw materials used, helping to reduce the environmental impact of their supply chains.
Implications for Companies
Companies must adapt to this new regulatory framework by adopting an integrated approach to sustainability and compliance. Advanced technological tools, such as those offered by Compass360, can facilitate due diligence management and ESG reporting by providing solutions for:
- Supplier Monitoring: By collecting and analyzing supplier sustainability data, companies can ensure compliance with regulations such as the Supply Chain Act, CSRD, and EUDR.
- Transparent Reporting: Companies must prepare detailed reports on environmental and social risks and impacts. Software solutions allow data centralization and ensure alignment with European regulatory standards.
Conclusion
The adoption of European sustainability regulations such as the Supply Chain Act and the CSDDD represents a significant challenge for companies operating globally. However, with the right tools, such as supply chain management platforms, businesses can turn regulatory compliance into a competitive advantage, enhancing transparency and sustainability in their operations.