Drivers for ethical, transparent supply chains: EU’s Directive
Though delayed, the proposal for an EU mandatory due diligence law called the Corporate Sustainability Reporting Directive (CSRD) was released just yesterday, on February 23. This law would require companies to demonstrate they can identify, prevent, remedy and report on human rights and environmental impacts in their supply chains. This would include factors such as child labour and exploitation of workers, and on the environment, for example pollution and biodiversity loss. For my brief on the relationship between human rights and environmental due diligence, visit this entry. Though small and medium sized companies are not covered by this proposal, they may be indirectly affected. Consumers and investors will be provided with more transparency and the new due diligence requirement will advance the protection of human rights globally.
Requirements for Companies
The new proposal requires certain large companies to adopt a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement. All companies within the scope of the proposal will also be required to:
proposal will require the companies within its scope to:
Integrate due diligence into policies.
Identify actual or potential adverse human rights and environmental impacts.
Prevent or mitigate potential impacts.
Bring to an end or minimise actual impacts.
Establish and maintain a complaints procedure.
Monitor the effectiveness of the due diligence policy and measures.
Publicly communicate on due diligence.
Voluntary to Mandatory
Though a number of the EU’s Member States have already introduced expectations on due diligence at a national level, and companies or industry organizations have done the same, the EU pushed for large-scale standardization beyond voluntary action with the CSRD. This proposal establishes a corporate sustainability due diligence duty to address negative human rights and environmental impacts.
The shift towards a rules rather than principles-based approach in the reporting requirements was largely driven by investor and broader stakeholder grievances regarding the lack of comparability in corporate reporting. In fact, 81% of companies backing standardisation in the European Commission’s public consultation in 2020.
The Impact of Supply Chain Transparency
Like me, others who work in this space have been watching the evolution of this directive closely. This is already causing a stir for businesses in the EU, especially when you consider a 2020 report by the World Benchmarking Alliance, which states that 46.2% of companies in Europe have no effective human rights due diligence (HRDD) mechanisms in place. Much like I stated in previous entries on due diligence, greenwashing or better polished ESG reports are not going to cut it for this directive. For those of us who understand the level of impact associated with supply chain transparency, the release of the proposed directive, and how it will mobilize effective human rights and environmental due diligence, is truly exciting.
While I intended to write this entry to simply highlight this driver for better supply chains, it’s worth noting the associated challenges. For one, given the lack of companies in Europe without effective HRDD mechanisms in place for their supply chains, there’s a huge data gap to be filled before companies can demonstrate compliance.
The Challenge Ahead
First and foremost, companies will likely face challenges pressuring or incentivizing subsidiary companies to report, or will struggle with understanding their impact at a local level where their supply chain extends outside of the EU.
There remains to be a silo-ing of environmental versus human rights due diligence both within the proposal, as well as in sustainability trends as a whole. Reconciling this as corporations come to better understand the how the impact of their businesses on the planet and people contribute to the achievement of the Sustainable Development Goals will be key.
Moving this European vision to the mainstream proves to be another large but exciting challenge ahead. How the EU will participate or promote the need for standardisation at the global level will be interesting.
Finally, I would be remiss not to mention that reporting tools and platforms - particularly digital ones, are still very much nascent in this space. Enabling investment in digitizing supply chain data to better capture and measure compliance will be an increasingly important challenge for the industry to transcend.
