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Those focused on human rights and sustainability have seen Europe play a leading role on these issues in the past few years. But more recently the European Union has put pen to paper with the introduction of the EU supply chain law, officially known as the Corporate Sustainability Due Diligence Directive, taking a bold step toward corporate accountability.
This groundbreaking legislation, which is a first from a global perspective, comes into effect in 2024. It will require companies operating in the EU to take full responsibility for human rights and environmental abuses throughout their global supply chains.
So, what are some of the key aspects of this transformative law and its potential impact on businesses?
The directive applies to companies operating within the EU, regardless of their nationality, with over 500 employees and exceeding 150 million euro revenue. Large non-EU companies exceeding the same size threshold with activities within the EU market will also be subject to the law. The law mandates that they undertake due diligence measures to identify, prevent, mitigate and account for potential adverse impacts on human rights and the environment within their supply chains. This includes both their direct suppliers and those further down the chain, often referred to as indirect suppliers.
The law applies to different aspects of human rights and sustainability. First is human rights, including fundamental rights like freedom of association, nondiscrimination, and prohibition of child and forced labor. Next is the environment, related to issues like biodiversity loss, pollution and climate change. And finally, companies are required to publicly report on their due diligence measures and establish accessible grievance mechanisms for stakeholders to report potential abuses.
Failure to comply with the law can result in hefty fines and exclusion from public procurement tenders. Additionally, civil liability lawsuits by stakeholders impacted by human rights or environmental abuses are possible.
The EU’s supply chain law represents a significant shift in corporate responsibility, requiring companies to invest in robust due diligence processes. It is no longer enough to be talking about certain actions; companies will need to have the due diligence and prove they are taking action. This will often lead to increased costs as implementing effective due diligence across complex supply chains will require resources and expertise.
While the law presents challenges, it also offers opportunities for businesses, such as enhanced brand reputation and improved supplier relationships. The law also promotes fair competition by holding all companies accountable for ethical sourcing practices.
The law will improve supply chain visibility as companies will need to map their supply chains comprehensively and improve communication with suppliers. With stronger risk management, potential abuses can be avoided and mitigated much earlier, reducing reputational damage and legal risks.
Supply chain visibility and risk management can be increased through innovation and collaboration. New technologies and collaborative efforts with industry peers can streamline due diligence processes. Using visibility data from platforms can increase the visibility and transparency of what is happening in the supply chain. The data can also be used to provide accurate reporting to allow companies to be compliant with the law.
The EU supply chain law is landmark legislation with far-reaching implications for businesses operating in the EU. There are ongoing efforts to establish international frameworks for corporate due diligence. The U.N. Guiding Principles on Business and Human Rights and the Organization for Economic Cooperation and Development Guidelines for Multinational Enterprises provide nonbinding frameworks that some countries might leverage when developing their own regulations. Some regions might have different priorities regarding which aspects of supply chain impacts to focus on, such as human rights versus environmental issues.
While navigating the law’s complexities might seem daunting, embracing its requirements can lead to a more sustainable and responsible future for both businesses and society. Companies that proactively adapt and adopt responsible sourcing practices and supporting technologies will be well positioned to thrive in this evolving landscape.
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About the author
Bart De Muynck is an industry thought leader with over 30 years of supply chain and logistics experience. He has worked for major international companies, including EY, GE Capital, Penske Logistics and PepsiCo, as well as several tech companies. He also spent eight years as a vice president of research at Gartner and, most recently, served as chief industry officer at project44. He is a member of the Forbes Technology Council and CSCMP’s Executive Inner Circle.