Supply chain accountability – legislation or not

So have we seen the last of the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), or will it, as some have suggested, reappear shortly? It could fall foul of European politics, with EU parliamentary elections in June potentially seeing it fall off the table.

With the threat of Germany and Italy abstaining, the CSDDD was taken off the agenda of a meeting of EU ambassadors and no date for a new vote has been agreed. However, this does not mean the issue of ESG risks and supply chain has gone away. There is plenty more regulation in this area, not least the Corporate Sustainability Reporting Directive (CSRD), which requires companies over a certain size to report on the material ESG risks in their supply chains in line with new European reporting standards.

As Sophie Tuson, senior associate at RPC and environment and climate change practice lead, points out: “There is now a growing patchwork of legislation globally requiring companies to address ESG risks in their supply chains. Broadly this falls into two buckets: mandatory reporting legislation, which requires companies to report on the material ESG risks in their supply chains, and supply chain legislation, which requires companies to take steps to address those ESG risks and minimise their environmental and social impact.”

She notes that the CSRD marks a turning point as it will force companies to report on a much broader range of ESG topics, including ‘scope 3’ carbon emissions, pollution, water use, biodiversity impacts, workers and affected communities. On the last count, it was estimated that CSRD compliance would require companies to report on around 1,000 new data points, says Tuson.

She also points to the EU’s new Deforestation Regulation coming into force at the end of 2024, which will require companies to conduct supply chain due diligence to make sure their products aren’t linked to deforestation.

Themis, a financial crime intelligence provider, says that according to research it has carried out (including focus groups and surveys of financial services professionals) as part of a project with WWF on financial institutions’ exposure to deforestation, it is very clear that legislation is what drives corporate behaviour, adding that “firms actively welcome it to clarify the expectations on them and their responsibilities.”

This is clearly behind the EU’s thinking, with its slew of directives and regulations on ESG and sustainability. But as the CSDDD delay shows, politics can put a spanner in the works at any point. In this case, it seems to be down to one German political party. For organisations, this may, or may not, be seen as a welcome move, at least in terms of reducing bureaucracy.

But it seems unlikely that the issue of companies having to have greater responsibility over their supply chains is going to go away. Best practice demands that companies are aware of issues such as child labour, modern slavery and environmental damage, and regulations or not, the potential reputational damage means that companies must understand, and have some responsibility and accountability for, their supply chains.

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