On 24 May 2024, the European Parliament passed the EU Supply Chain Act, requiring European companies to uphold human rights and environmental standards in their supply chains. The law targets exploitation, child labour and pollution, allowing victims to seek compensation and imposing fines of up to 5% of annual global turnover.<\/p>\n
Many large multinational corporations have faced allegations of child labour in their supply chain. This type of human rights abuse, along with environmental destruction, has long been a hidden consequence of global sourcing.<\/p>\n
The European Supply Chain Act, officially known as the EU Corporate Sustainability Due Diligence Directive (CSDDD)<\/strong>, is poised to reshape the business landscape. With the legislation expected to push thousands of companies worldwide towards more sustainable practices<\/a>, it\u2019s time to delve into what this act entails, how it will affect businesses, and what they need to do to prepare.<\/p>\n The European Supply Chain Act is designed to ensure that companies operating within the EU are accountable for the human rights and environmental risks associated with their supply chain activities. Essentially, it holds businesses liable for any violations that occur, not only within their own operations but throughout their entire supply chain, from direct suppliers to indirect suppliers.<\/span><\/p>\n The law is closely aligned with the<\/span> EU Corporate Sustainability Due Diligence Directive (CSDDD)<\/u><\/span><\/a>, which establishes the framework for corporate sustainability. The CSDDD encourages companies to adopt responsible business practices that respect human rights and minimise their environmental impact. Both these directives work in tandem to ensure businesses conduct thorough due diligence when sourcing from global markets.<\/span><\/p>\n Companies operating within the European Union must comply with rigorous due diligence requirements under the European Supply Chain Act. This includes evaluating potential risks throughout their supply chains and procurement<\/a> activities, drawing on the benchmark established by Germany’s Supply Chain Act for responsible sourcing and accountability.<\/span><\/p>\n Companies are required to identify, prevent and mitigate adverse human rights and environmental impacts including global warming throughout their overall supply chain, including indirect suppliers<\/a>.<\/span><\/p>\n Their responsibility extends to the actions of their suppliers and subcontractors, aligning with the proactive measures outlined in Germany’s legislation.<\/span><\/p>\n To comply with the<\/span> EU Supply Chain Law, companies must adhere to several due diligence obligations:<\/p>\n Due Diligence Requirements: <\/strong>Businesses are required to establish a robust due diligence process that identifies, prevents and mitigates any adverse human rights or environmental impacts within their supply chain<\/span>.<\/p>\n Scope of Responsibility: <\/strong>Companies are not only accountable for their internal operations but also for their indirect business partners and suppliers. This means they need to assess risks throughout their global value chains.<\/p>\n Reporting Requirements: <\/strong>Transparency is essential. Companies must publicly disclose their due diligence efforts, outlining the steps taken to prevent and address risks. This new approach places significant responsibility on corporations to ensure they collaborate with ethical suppliers, regardless <\/span>of their geographical location.<\/p>\n Not all companies are subject to the EU Supply Chain Act. The legislation applies to businesses based on their size and turnover. Larger corporations, particularly those with complex supply chains, are the primary targets.<\/span><\/p>\n Size and Scope:<\/strong> Initially, the EU Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) targets companies with over 1,000 employees and a global turnover exceeding \u20ac450 million<\/strong>. Over time, this will expand to include smaller businesses.<\/p>\n Global Reach:<\/strong> The law does not solely impact EU-based companies; it also applies to non-EU companies with significant business activities in the European Union<\/strong>. Therefore, multinational corporations with business partners or operations in the EU will also<\/span> need to comply as well.<\/p>\n Contradicting Numbers:<\/strong> Interestingly, the scope of the CSDDD has changed over time<\/span>. Initially, it impacted companies with 500 employees and a \u20ac150 million turnover. After thorough negotiations, the final numbers were increased<\/span> to 1,000 employees and \u20ac450 million. This shift caused significant debate as to <\/span>which companies would fall under the new law.<\/p>\n Compliance with the European Supply Chain Act is structured in phases, gradually imposing obligations on companies based on their size, employee count and revenue. This phased approach ensures that larger corporations are targeted initially, with smaller businesses having additional time to adapt to the new regulations.<\/span> The timeline for compliance is as follows:<\/p>\n 2027: Large Enterprises (5,000+ Employees \/ \u20ac1.5 Billion Turnover)<\/strong> 2028: Mid-Sized Enterprises (3,000+ Employees \/ \u20ac900 Million Turnover)<\/strong> 2029: Smaller Enterprises (1,000+ Employees \/ \u20ac450 Million Turnover)<\/strong> National Implementation Variations: <\/strong>Although the EU Supply Chain Act is an overarching directive, the specifics of how it will be transposed into national law will vary across EU member states. Companies operating in multiple EU jurisdictions must stay updated on the specific<\/span> legal timelines and obligations for each country, as some may impose stricter regulations or shorter deadlines.<\/p>\n Early Preparation: <\/strong>Companies should not wait until the formal deadlines to start compliance efforts. Early preparation will be key in\u00a0minimising <\/span>disruptions to business operations and supply chains<\/span>. This includes assessing existing CSR (Corporate Social Responsibility) policies and aligning them with the directive’s requirements, as well as incorporating sustainability KPIs into their business performance metrics.<\/p>\n Use of Technology for Compliance: <\/strong>Many companies, particularly larger ones, are expected to invest in supply chain management software and risk assessment tools<\/a> to efficiently monitor and audit their global supply chain activities for potential risks. These technologies can automate due diligence processes and provide real-time insights into supplier performance.<\/p>\n Penalties for Non-Compliance: <\/strong>Penalties for failing to meet the directive’s standards can vary depending on the severity of the breach, ranging from financial penalties to potential legal liabilities for any adverse impacts caused. Large corporations are likely to face heavier fines and more public scrutiny, while smaller enterprises may receive warnings or lighter penalties, reflecting their capacity to implement compliance measure.<\/p>\n What Is the Objective of the EU Supply Chain Law?<\/h2>\n
What Are the Obligations for Companies?<\/h2>\n
Who Is Affected by the EU Supply Chain Directive?<\/h2>\n
When Will Companies Have to Comply?<\/h2>\n
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\n \nNet turnover threshold<\/td>\n Number of employees<\/td>\n Date of compliance<\/td>\n<\/tr>\n<\/thead>\n \n \u20ac1.5 billion<\/td>\n 5,000+ employees<\/td>\n 26 July 2027<\/td>\n<\/tr>\n \n \u20ac900 million<\/td>\n 3,000+ employees<\/td>\n 27 July 2028<\/td>\n<\/tr>\n \n \u20ac450 million<\/td>\n 1,000+ employees<\/td>\n 28 July 2029<\/td>\n<\/tr>\n<\/tbody>\n<\/table><\/div>\n Compliance Phases<\/strong><\/h3>\n
\nThe first wave of compliance begins in 2027, primarily targeting the largest of enterprises. These are companies with over 5,000 employees and an annual global turnover of \u20ac1.5 billion or more. Since these businesses typically have more<\/span> complex supply chains and global operations, the impact of the law on them<\/span> is expected to be significant. Large companies will likely face increased scrutiny, requiring them to develop comprehensive due diligence procedures to address internationally recognised human rights abuses<\/span>, environmental risks and ethical sourcing.<\/p>\n
\nThe second phase, commencing in 2028, broadens the scope to include companies with at least 3,000 employees and a turnover of \u20ac900 million or more. While these businesses are smaller than the largest multinational corporations, they still operate across borders and face considerable supply chain risks.<\/p>\n
\nBy mid 2029, enterprises with 1,000 or more employees and an annual turnover of \u20ac450 million will be required to comply. While<\/span> these companies may not have as extensive supply chains like the companies in previous batches, they must still perform adequate due diligence, particularly if they operate in high-risk sectors such as manufacturing, raw materials or textiles.<\/p>\nAdditional Considerations for Compliance<\/strong><\/h3>\n
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