CSDDD: Preliminary Agreement on the EU Supply Chain Law under Question
Will the Corporate Sustainability Due Diligence Directive (CSDDD) be overthrown?
In recent weeks, the FDP has raised concerns that could jeopardize the adoption of the EU Supply Chain Law, previously agreed up on in December 2023. Find here our CHOICE Event #69 on this topic – and in the following a brief overview of what is at stake, shedding light on the potential impacts of a cancellation on businesses, particularly those focused on climate and sustainability.
CSDDD Overview – What does it stand for?
The CSDDD is designed to set obligations for large companies regarding their supply chains, focusing on adverse impacts on human rights and the environment. In particular, it mandates companies to adopt and implement transition plans for climate change mitigation.
Three Groups of EU and Non-EU Companies are impacted
- Group 1: EU-based companies, with more than 500 employees and a turnover exceeding €150M.
- Group 2: EU-based companies with over 250 employees and a €40M turnover, provided that 50% of their revenue comes from high-risk industries like fashion, minerals, or agriculture.
- Group 3: Non-EU-based companies with over €150M turnover, at least €40M coming from business within the EU.
According to EU Justice Commissioner Didier Reynders, “Only companies that protect human rights and do not harm the environment should operate within the EU.” This underscores the directive’s commitment to driving positive change on a global scale.
A vote on the CSDDD at the level of EU ambassadors is planned for 9 February. After a positive vote, EU countries have two years to incorporate CSDDD into national law.
How does Climate play into the CSDDD?
Undoubtedly, one of the most impactful aspects of the CSDDD is its implications for climate protection. The directive obliges companies to formulate and execute a transition plan aligning their business model and strategy with the following objectives:
- Aligning supply chain with 1.5°C target in line with the Paris Agreement.
- Achieving climate neutrality, as defined by the European Climate Law, including the 2050 climate neutrality target and the climate target to decrease 55% of emissions by 2030 in comparison to 1990 for operations within the EU.
- Integrating all suppliers (direct and indirect) into specific climate risk and impact measures, to identify fitting actions to reduce, mitigate and prevent emissions.
- The climate due diligence obligations must be integrated into the management systems. Companies must track complaints and provide transparent, public information about their due diligence practices, including an annual report.
- Companies are obliged to control and monitor the effectiveness of these measures.
CSDDD Critic and Implications – On an European Level
The FDP has now, after agreeing in December, concerns about the perceived “unrealistic” rules and the potential burden on companies amid high energy prices and international crises.
FDP ministers state that Germany, despite initially supporting the EU directive, cannot endorse the current trilogue outcome. They argue that the proposed law would impose significant civil liability on companies, exceeding what’s outlined in Germany’s own supply chain due diligence law.
EU-wide CSDDD versus the German Supply Chain Law
The EU’s directive expands the German Lieferkettensorgfaltspflichtengesetz (Short: LkSG; Englisch: Supply Chain Due Diligence Act), which took effect on January 1, 2023, significantly.
- The scope of regulation covers far more European companies: CSDDD addresses companies with 250+ employees, compared to the German law with 3,000+ employees, and from 2024 onwards 1,000+ employees.
- The EU directive mandates a broader consideration of the entire supply chain: Including users and disposers of products, not just direct suppliers (Tier 1).
- The EU regulation may introduce civil liability for companies: Allowing affected parties to seek damages in European courts.
CSDDD – the missing Piece to drive Climate Transformation
For companies, especially those with global supply chains, understanding the potential impacts of the CSDDD is essential. The directive may increase reporting efforts, but it also aims to achieve more on-the-ground benefits for people while reducing emissions, and yes, also overall bureaucracy for companies.
CSDDD accelerates Sustainable Business Practices
How is that? CSDDD aligns with major sustainability guidelines, including the CSRD. It is the framework that bring those requirements not only into reporting, but into business practices. This way, businesses should prepare for potential changes and consider implementing comprehensive sustainability strategies across their entire value chain.
What does CSDDD mean for SMEs?
SMEs are indirectly impacted by the EU Supply Chain Due Diligence Directive, as large corporations will likely extend their diligence requirements to their suppliers and business partners. SMEs have the opportunity to secure a competitive advantage by proactively aligning with the directive’s principles.
CSDDD aligns with ESRS E1 – Climate Change
CSDDD vs. CSRD: It’s crucial to distinguish between the CSDDD and the Corporate Sustainability Reporting Directive (CSRD). While the CSDDD focuses on due diligence along supply chains, the CSRD primarily serves as a reporting mechanism for sustainability actions. Both directives, however, align with international frameworks such as the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. Also both ask companies to report their climate goals, actions and reductions along a transition plan.
Doing so, it streamlines reporting – with actions. The overarching goal of the climate guidelines in CSRD and CSDDD is to contribute to the EU’s 2050 climate neutrality target. Companies must therefore publish climate-related quantitative information. Including energy consumption, greenhouse gas emissions, reduction targets and measures to reduce emissions and the negative impact on the environment. In addition, the standard provides suitable mechanisms for early adaptation to climate change – entirely in the spirit of risk management.
All of this increases transparency regarding climate-relevant information and promotes a profound transformation of business models. As it requires companies to now just report, but achieve science-based climate target – in the form of well-founded emission reduction paths.
How can Companies prepare and drive Emission Reduction?
The starting point is a complete Corporate Carbon Footprint (CCF), including Scope 3 emissions, according to the Greenhouse Gas Protocol. At the same time, an emission reduction target with a time horizon of 2030 is key, including the supply chain. Progress towards net zero should then be reflected within the own company – and along the supply chain. As most emission, typically more than 70% are generated in the supply chain, it is essential to integrate suppliers in an engagement program. Assessing their climate maturity, aligning climate targets and acceleration actions together.
In order to get there, the development of a so-called Climate Transition Plan is a prerequisite. This maps your decarbonization path in the form of measurable measures and comprehensible intermediate goals. Finally this work pays into your general sustainability reporting as well as into the development of a future-driven strategy, that includes your supply chain, business model innovation and emission reduction efforts.
Conclusion: It’s Time to Act!
While the political poker surrounding the CSDDD unfolds, businesses must stay informed and be proactive in preparing for the market changes that are already existing and upcoming. The outcome of the nearby EU Council decision will have a significant impact on the future of supply chain sustainability and corporate responsibility. Stakeholders, including corporate decision-makers and suppliers, should closely monitor developments and prepare to lead the market.
Getting into Climate Action along the Supply Chain
The EU Supply Chain Due Diligence Directive presents a unique chance for businesses to drive meaningful climate action across their supply chains. By aligning with the directive’s requirements, companies can contribute to a more sustainable future while enhancing their reputations and market positions.
With the help of our Climate Intelligence Platform, you can take the next step. Use the software tool to enhance transparency, collect data and drive collaboration with your suppliers, fostering a stronger commitment to climate-conscious practices. The Climate Intelligence Platform collects climate-relevant data from suppliers, provides specific Climate Scorecards and insides into climate risks, potentials and best practices to reduce emissions.