CSDDD raises risk of doing business with China

A recent paper on the European Union Corporate Sustainability Due Diligence Directive (CSDDD) published by the European Business Organisation Worldwide Network (EBO) advises European firms active in China to tread carefully when the directive becomes effective. The network, the only organisation that represents European business interests in markets outside the EU, points out that while the CSDDD contains language to protect companies that simply cannot fulfil some requirements, there is significant uncertainty around the extent of protection that could be provided in practice. “For example, the exemption for state security in the text says: ‘Business partners shall never be obliged to disclose classified information or other information the disclosure of which would cause a risk to the essential interests of a state’s security.’ However, how the EU defines ‘essential interests of a state’s security’ may well differ from how third countries do,” explains the paper. “Taking China as an example, state-owned enterprises (SOEs) form an inseparable part of the supply chain for almost every company, as some sectors and key services, like the provision of electricity, are based entirely around SOE monopolies. However, a growing focus on national security has made it increasingly difficult for state-linked entities to facilitate due diligence, particularly in certain regions of the country,” it states. China’s recently amended State Secrets Law includes a vaguely defined concept of ‘work secrets’, which has the potential to significantly expand the scope of what may be deemed ‘sensitive’ with regard to state-linked entities. Similarly, amendments to China’s Counter-Espionage Law refers to the illegal collection of “other documents, data, materials or items related to national security,” explains the EBO. “This may put companies working in strategically critical fields, such as high-tech industries, medicine and artificial intelligence (AI), as well as those engaged in research and development (R&D) work more broadly, at increased risk,” it warns. “Furthermore, China’s governance structure means that policy implementation at the local or organisation level is often much stricter than original legislation requires, meaning that even in instances in which related rules or regulations do not prohibit due diligence-related activities, it may be impossible to carry it out in practice”, adds the network. On top of this, the fear of breaching security-related legislation may be enough to deter some compliance and certification providers from carrying out work in China. The network points out that there have already been reports that some European pharmaceutical inspectors have refused to travel to China due to fear of arrest under the Counter-Espionage Law. “On top of this is the potential risk that gathering certain information may carry severe consequences, even if that information is not classified as sensitive at time of collection. These concerns of both EU and third-country citizens who carry out due diligence work are legitimate, and result in them being unwilling to undertake such activities in China,” points out the paper. “If European firms are unable to identify a company or organisation to do so, they may ultimately be forced to exit and relocate production, ceding important markets to non-EU competitors with potentially lower human rights and environmental standards,” warns the network. Provisions intended to reduce the potential for conflict, such as those related to state security, must therefore be clear and precise enough so that firms can be confident of operating in a way that protects the safety of their and their suppliers’ personnel, argues the paper. “Compliance must also be commercially viable to ensure that the CSDDD does not become unenforceable. If it is not, the directive will not only reduce the footprint of European business globally, but also reduce the footprint of European values and the high standards companies uphold when conducting business outside Europe, contrary to the EU’s aims of advancing human rights and responsible environmental stewardship,” it adds. The network recommends that clarification is needed on the provisions for companies operating in third-country markets in which the directive may conflict with local legislation or practices. It also argues that options need to be provided for unique situations in which due diligence may not be possible and there are no alternative suppliers, such as with the provision utilities controlled by a state monopoly. The network also advises that European firms active in China need to ensure pathways to compliance with the directive are commercially viable and do not endanger personnel involved in due diligence work. It advises the EU to negotiate agreements with third countries and work to create an agreed list of independent, third-party due diligence service providers to help manage this risk.

CSDDD raises risk of doing business with China

Compliance challenges rise along with national security concerns

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