The Future of Supply Chain ESG Due Diligence 

The EU’s main tool for ensuring a cleaner future is the EU Green Deal - a set of initiatives with the goal of reducing EU greenhouse gas emissions by at least 55% by 2030 and becoming a climate-neutral continent by 2050. To achieve these ambitious goals, a significant volume of new legislation has recently been adopted as regards ESG and sustainability. 

These regulations impose reporting obligations on large companies (eg the EU Taxonomy and the Corporate Sustainability Reporting Directive), and will also affect smaller companies with lower revenues. Some businesses, eg the financial sector, are impacted by even stricter rules.

As a result, companies are modifying their strategies to reflect sustainability as the crucial driver of their business. More and more companies are realizing that to keep up with their competitors and be compliant with expanding legal obligations, they need to implement measures supporting the ESG agenda across all their operations. 

Although many companies have already taken steps towards sustainability in relation to data collection and creating sustainability reports and are making their impact on the environment, their employees, and society as a whole a greater priority, they must also consider the impact their business partners have. ESG and the supply chain are inevitably closely linked. The reality is that companies cannot truly understand their own ESG position without looking at their supply chain and considering the impact of their business partners. Collecting data from business partners is not only very challenging, but in the event of discrepancies, it can negatively affect the overall ESG rating of a company. 

The Corporate Sustainability Due Diligence Directive (“CSDDD”) seeks to oblige companies to behave responsibly and to look closely at their supply chain. CSDDD is different from the previous regulations, as it covers more than just reporting obligations and companies’ statements about their ESG performance. The CSDDD focuses on what companies actually do about ESG. Experts consider CSDDD as a potential game-changer, due to its crucial role in promoting responsible business practices, protecting human rights and the environment, and establishing stakeholders’ trust in the future. The core elements of CSDDD are identifying, bringing to an end, preventing, mitigating and accounting for negative human rights and environmental impacts in the company’s own operations, their subsidiaries and their supply chains in the EU and globally.

Companies will have to identify the negative ESG impacts of their activities and do everything in their power to prevent these whenever and wherever possible. It will also require companies to conduct due diligence on, and take responsibility for, human rights abuses and environmental harm throughout their global supply chain, no matter how big and complicated their supply chain is. Should companies fail to comply with the CSDDD, they will face extensive sanctions. 

The CSDDD will hold companies accountable and liable for environmental degradation and human rights abuses, within and outside the EU. Members States – including Slovakia – will have to determine their own national enforcement mechanisms, such as administrative supervision, sanctions, civil liability, financial incentives and their combination. Sanctions will include fines of up to 5% of a company's net worldwide turnover, naming and shaming of a company on public registers, the taking of goods off the market and, for non-EU companies, a ban on public procurement in the EU. 

The CSDDD applies to EU companies with over 500 employees and a global turnover of €150 million+, and non-EU companies with a turnover of €150 million+/year in the EU. If an EU company has more than 250 employees and a global turnover of €40 million+ – with half of the turnover from a high-risk sector, such as manufacturing of textiles, leather and related products, agriculture, forestry and fisheries and the extraction and manufacturing of mineral products – these new requirements will apply below the higher thresholds. Non-EU companies with a turnover of €40 million+ in the EU, where half of this amount comes from high-risk sectors, will be also affected by the CSDDD.

Once the CSDDD has been adopted – which is not expected before 2024 – Member States will have two years to implement it into national legislation. 

Companies which are delaying implementation of ESG will be caught unprepared by the new EU laws, which could result in financial sanctions and extensive reputational damage, potential loss of business and a tarnished brand. 

Environmental and societal responsibility and ensuring compliance with the applicable laws will have huge advantages, not only from an ethical and moral point of view, but also as regards the bottom line for all companies in the short and long term.