CSDD – Is new regulation the solution to create transparency in supply chains?

Reporting standards encompassing human rights due diligence, are moving up the corporate agenda. Too often companies breach human rights standards across the world. Only recently, the release of a new documentary uncovered children in Ghana working with machetes on cocoa farms that supply Mondelēz International. Additionally, in September 2021, such retailers as Hugo Boss and Uniqlo were accused of using cotton produced with forced labour from the Xinjiang Uyghur region in China. Unsurprisingly, consumers are expecting more transparency from the brands that they love; this is inevitably creating growing pressure for companies to report more comprehensively on their value chains.

The European Commission has adopted a new proposal for a Directive on Corporate Sustainability Due Diligence (CSDD), encompassing human rights and environmental impacts. The proposal aims to “foster sustainable and responsible corporate behaviour throughout the global value chain” and is largely in line with the Guiding Principles on Business and Human Rights established by the United Nations. The proposal will be presented to the European Parliament and the Council for approval, and member states will have two years to transpose the directive into national law. Although several European countries, such as Germany and France, already have mandatory due diligence laws established, the regulation aims to bring more coherence and adherence across EU legislation.

The directive applies to EU companies with 500 or more employees and a net turnover of more than €150 million. However, if active in a risk sector, such as textile or agriculture, the threshold is lowered to 250 employees and €40 million. These companies will need to “identify and even prevent, end or mitigate the negative impact that their activities have on human rights and the environment”. The directive will be compulsory in all EU member states, and authorities may carry out investigations, which can result in fines imposed or compliance orders issued.

Compared to country-specific legislation, the supply chain is better defined, the scope of protection is broader, and the duties of directors, such as the integration of CSDD in the corporate strategy, are clearly set out. The integration of climate change and human rights in the proposal, highlights the intertwining of these topics and the growing attention on just transition.

This is a step in the right direction, but is this enough to eradicate illegitimate human rights practices in supply chains? While the value chain is clearly outlined as “direct and indirect established business relationships”, short-term relationships with suppliers do not fall within the definition. Sadly, this is often where human rights breaches occur. There is a risk that businesses could bypass liability, by setting up short-term partnerships. This lack of comprehension could essentially wind up serving as an escape clause – a loophole that could have a catastrophic effect on employees. This is especially concerning, considering that the current system often relies on smaller companies and individuals, with less power, to flag wrongdoings in the supply chain.

While the legislation may not be perfect, it should serve as a wake-up call to corporates. Improving supply chain transparency is not going away. In fact, it will continue to demand businesses’ time, attention and finances. Practitioners should seek to adopt a more proactive approach to identifying, remediating and mitigating breaches in human rights.

Author: Laurien Callens