Planned EU Supply Chain Act (CSDDD): What Affected Companies Should Prepare For

The planned EU Supply Chain Act (CSDDD) is based on a proposal from the European Commission and is intended to apply to companies with more than 250 employees under certain conditions. The requirements apply not only to the company's own business area but also, depending on company size, influence, and expected impacts, to indirect and direct suppliers. The affected parties are

• all companies based in the EU with more than 250 employees and a global turnover of more than 40 million euros,
• parent companies with more than 500 employees and a global turnover of more than 150 million euros, and
• non-EU companies with a global turnover of more than 150 million euros, of which at least 40 million were generated in the EU.

SMEs will also be indirectly affected as part of the supply chains of obligated companies. The potential impacts can be seen in the already implemented German Supply Chain Due Diligence Act (LksG), which initially applies to companies with more than 3000 employees. According to surveys, this leads to a cascading effect: requirements are passed on from large companies to their suppliers and smaller partner companies. However, the latter often lack the necessary structures as well as personnel and financial resources to provide the required information. According to a survey by the DIHK, 41 percent of surveyed companies with fewer than 250 employees report that they have already been contacted regarding their human rights and environmental risks. Therefore, companies of all sizes are well advised to engage early with the potential provision of relevant data.

The planned CSDDD directive focuses primarily on human rights and environmental due diligence obligations. These include the identification, assessment, mitigation, prevention, or termination of existing or potential risks and disruptions that negatively impact the compliance with human rights or environmental protection aspects – not only within the company itself but also in subsidiaries and along the entire value chain. The goal of the EU Supply Chain Act is to promote a fair and sustainable global economy.

In addition to identifying actual and potential negative impacts on human rights and environmental protection, the draft of the CSDDD also considers the following steps as mandatory:

• the integration of due diligence obligations into corporate policies and management systems
• the establishment of complaint procedures so that companies can quickly respond to potential human rights violations or environmental damage in their supply chain
• the provision of reporting on sustainability efforts and due diligence obligations as well as statements on the implementation of measures, including an annual report
• the monitoring and evaluation of the effectiveness of the measures
• the obligation of supervisory and management boards to ensure compliance with the provisions and to obtain relevant information from management

Furthermore, companies with an annual turnover of more than 150 million euros are to inform with a transformation plan about the measures they intend to take to contribute to the emission reduction targets of the Paris Climate Agreement.

Following the proposal from the European Commission in February 2022, the decision of the European Council in December 2022, and now the agreement of the EU Parliament in June 2023 on a position, the way is clear for the start of the so-called trilogue negotiations. The directive can be adopted when the EU Parliament agrees with the Council of Ministers on a common position. Although it is still unclear when and with what specific content the CSDDD will apply, affected companies can expect a transition period of several years.

Nevertheless, many of the required measures will become relevant much earlier, as the planned EU Supply Chain Act correlates with the European Green Deals in terms of further regulatory measures that are also intended to promote the transition to a sustainable economy. For example, with Sustainable Finance, the basis for a sustainable EU-wide financial system is to be created. The already adopted Corporate Sustainability Reporting Directive (CSRD) also obliges many companies in the future to publish a detailed report on their sustainability efforts, which must be prepared according to binding standards. So how can companies meet the increasing demands?

On the way to greater operational sustainability, companies should take a look at their own supply chain and continuously check for optimization potential. Strategic supply chain processes are extremely important for complying with legal requirements such as the LksG, the CSRD, or the planned EU Supply Chain Act. Digital technologies can significantly contribute to achieving sustainability goals, as they have a major impact on the net savings potential of CO2 emissions.

Transparency is the key factor for successful implementation of the EU Supply Chain Act: Those who have a detailed overview of their own supply chain processes and their supplier network can prevent and act. Defined criteria and precise assessment tools through a holistic SCM including risk management serve as a reliable basis to analyze existing supplier relationships, optimize processes, and meet the requirements regarding compliance with human rights and environmental protection.

Compliance with the standards of the planned EU Supply Chain Act offers the opportunity to position oneself as a sustainable company and to meet the generally growing green awareness. A responsible supply chain with a technology-based SCM strengthens one's future and competitiveness – especially in light of the increasing pressure and expectations from customers, regulatory authorities, and the public. Companies benefit in multiple ways, as the increased use of data and newly gained transparency provide further advantages: Logistics managers are able to identify hidden cost and optimization potential along the supply chain in favor of greater efficiency and increase the resilience of the company.