The European Union has recently agreed on new rules regarding supply chain due diligence, as well as other laws related to toxic air, packaging, and packaging waste. The Corporate Sustainability Due Diligence Directive establishes legal liability for corporations on environmental and human rights issues in European courts. This is in addition to the existing Corporate Sustainability Reporting Directive, which requires companies to be transparent about their ESG risks and impacts. Different Member States have implemented these rulings in various ways, with France imposing high penalties for non-compliance.
The new due diligence rules under the C3D go beyond the EU’s existing disclosure framework, requiring companies to take action to manage human rights and environmental risks in their global value chains. This includes implementing policies, conducting risk assessments, and mitigating adverse impacts. Companies will need to publish and implement a climate change transition plan in line with the Paris Agreement’s 1.5C temperature goal. This emphasis on corporate responsibility in managing supply chain impacts is seen as crucial for global sustainable development efforts.
Despite being weaker than originally hoped, the CS3D will still impact corporate accountability, with a significant focus on sustainability and new due diligence processes. The legislation aims to ensure that companies take responsibility for environmental harm and human rights abuses in their value chains, with the threat of legal action and fines for non-compliance. With a phased implementation over five years, the law will eventually affect all companies with over 1,000 employees and a turnover of €450 million.
The passing of the C3D is expected to have a profound impact on corporate liability, with senior executives potentially facing liability for company transgressions. The legislation introduces the risk of liability, allowing victims to claim compensation from companies for damages caused by human rights or environmental violations. This could lead to a shift in executive perception of the consequences of such transgressions. Privately held companies, which have not faced the same disclosure requirements as public companies, will also be affected by the legislation.
The ‘Brussels Effect’, as described by Professor Anu Bradford, refers to the global influence of laws passed in Brussels. The C3D is expected to have a cascading effect throughout the global supply chain, as larger companies pressured to comply with the new laws will require their suppliers to do the same. This will lead to increased demands on suppliers and customers for information on their environmental and social performance. The EU’s influence on sustainability reporting requirements is already being felt globally, with countries like Canada and China aligning their taxonomy with EU standards.
The law now awaits final approval by Member States before being transposed into national law. Despite its initial weaknesses, the CS3D represents a significant step towards corporate accountability and sustainability in the EU. As companies prepare to comply with the new regulations, there is a growing awareness of the importance of responsible supply chain management and the potential impact on operational costs and profitability. By enforcing the law and filling any loopholes, the EU aims to create a more sustainable and transparent business environment.
