Lilly Salus, Stanford University
The European Union’s new supply chain directive is the first global law of its kind that aims to increase corporate accountability. Officially known as the Corporate Sustainability Due Diligence Directive (CSDDD), the law targets companies that operate in the EU regardless of their nationality or subsidiaries. Companies that have more than 1,000 employees and a net turnover of at least €450m are required to take full responsibility for the preservation of human rights and the prevention of environmental abuse in their global supply chains. Concretely, this means that EU-based companies or non-EU-based companies that conduct a minimum level of business in the EU will become liable for the actions of their suppliers, including matters involving child labor and environmental issues (such as pollution and the loss of biodiversity). The law includes a framework that enables communities to sue EU companies for environmental harm and human rights violations across their supply chains.
The CSDDD was approved by the European Council on March 15th after months of delays. Fueled by concerns that the law could pile excessive reporting requirements on European businesses, criticism by both politicians in EU member states and leaders of big-name companies delayed the approval process. After the final draft of the CSDDD was released toward the end of January, Germany announced its decision to abstain from the vote, with other members like France and Italy soon following suit. With several countries set to abstain from the vote, it was clear that concessions would have to be made if there would be any chance for the European Council to get a majority (at least 15 EU countries collectively representing at least 65% of the EU population).
Over the course of 45 days of negotiations, the criteria specifying which companies would be affected were loosened so that fewer medium-sized companies would be impacted. When the law was originally agreed upon in December, it was supposed to apply to companies with more than 500 employees (now 1,000 employees) and a net turnover greater than €150m (now tripled to €450m). Additionally, the final deal scrapped the high-rise sector approach, which stipulated that companies that do not meet the employee or revenue requirements would still be affected by the law if they operate in an industry that has a high likelihood of suffering from human rights or environmental issues. Estimates by environmental groups suggest that the new criteria exclude 70% of the companies that would originally have been affected by the law. As a result, the law would only impact about 0.05% of the total number of businesses that operate in the EU. The revisions also mean that the CSDDD will be phased in over a longer period of time than initially planned. For example, in 3 years, all companies that have 5,000 employees and a turnover of €1,500m will be impacted by the directive, whereas companies with 1,000 employees and a turnover of €450m are only set to be affected in 5 years (2029). Nonetheless, the fines for breaching the rules remain harrowing: Fines could be as large as 5% of a company’s global turnover.
The CSDDD is revolutionary in that it forces companies to take action in the name of sustainability or risk facing hefty fines, which could lead to benefits such as improved brand reputation and better social practices. However, the law is still a matter of contention within the EU and beyond. Around 4,000 companies that operate in EU countries but are headquartered in non-EU countries will be affected, which has drawn the ire of businesses abroad. In a post on X, the Chinese Chamber of Commerce to the EU said that the law “could be very concerning,” calling for clarification by the EU and warning of potential trade disruptions. At the moment, the CSDDD is moving through the Legal Affairs Committee of the European Parliament. Although the law is expected to pass, it comes at an interesting time with the EU parliamentary elections set to take place in June 2024. Regardless of the CSDDD’s ultimate fate, the law is sure to remain front and center in the global dialogue surrounding corporate social responsibility.