The European Council has approved a watered-down version of the Corporate Sustainability Due Diligence Directive after 45 days of negotiations. The directive aims to push companies to identify their exposure to unethical practices, human rights abuses, and adverse environmental issues throughout their value chain. The EU CSDDD has faced delays and changes, with the German Supply Chain Act and the Uighur Forced Labor Prevention Act setting benchmarks in Europe and the United States, respectively. This new legislation is urging companies to evaluate their supply chains more thoroughly than ever before.
The revised directive will now impact about 0.05% of businesses operating within the EU, as the criteria have been increased to companies with over 1,000 employees and a turnover of 450 million euros. The phased implementation will start in 2027 with companies having 5,000 employees and a 1.5 billion euros turnover being required to report. By 2029, companies with 1,000 employees and 450 million euros turnover will be impacted, prioritizing the larger corporations first.
The CSDDD aims to promote sustainable and responsible corporate behavior by embedding human rights and environmental considerations into companies’ operations and corporate governance. Companies will need to identify, prevent, mitigate, and account for negative human rights and environmental impacts throughout their operations, subsidiaries, and value chains. They will also need to verify compliance with these steps among their direct and indirect business partners, potentially by using independent third parties or industry experts for verification.
Under the proposed rules, companies will be held liable for damages if they fail to prevent or address adverse impacts in their value chain. Those affected will be able to claim compensation and take legal action. The directive also includes a significant requirement for companies to adopt a “Climate Transition Plan” in alignment with the Paris Agreement, signaling a move towards decarbonization in the corporate sector.
Procurement organizations face challenges in ethically sourcing throughout their extended supply chain. Risk management solutions, like Everstream AI and Exiger, which offer visibility across multi-tier supply chains in real-time, stand to benefit from the directive. These solutions leverage AI technologies, like generative AI and natural language processing, to track events across millions of supply chains and assess compliance with various standards. By combining AI predictions with manual mapping, companies can verify the structure of their extended supply chain more quickly.
Overall, the Corporate Sustainability Due Diligence Directive is poised to bring significant changes for companies operating within the EU. With a focus on ethical sourcing, human rights, environmental impact, and climate transition, companies will need to adapt their operations and supply chain practices to comply with the new requirements. Risk management solutions that offer advanced AI capabilities and multi-tier supply chain mapping will play a crucial role in helping companies navigate these new regulations and ensure compliance with the directive.
