NEWS

The EU’s Corporate Sustainability Due Diligence Directive: How could this affect my business?

Published on: 31st March 2022

In this exclusive piece, Todd Merton, head of Business Development at the not-for-profit organisation IETP, outlines how the EU Due Diligence Act will impact toy companies.

In February, in an effort to combat the serious issues of child and forced labour as well as the environmental abuses still prevalent in Europe and around the world, the European Commission released a proposal for a Directive on Corporate Sustainability Due Diligence (aka: the EU Due Diligence Act). To help foster sustainable and responsible corporate behaviour throughout the global supply chain, the directive will require companies to conduct deeper due diligence across their entire supply chain to identify and prevent these types of abuses.

While this initiative mainly targets EU businesses with more than 500 employees and revenue of €150m (250/€40m in high-impact sectors such as textiles or agriculture), some burden from this due diligence may be felt by businesses below these thresholds, particularly by those found within the supply chains of these larger companies. This directive will also have implications for non-EU companies, if they generate revenue levels within an EU market that exceeds the above levels.

Here at IETP, we will continue to monitor this proposal for timeline changes and any updates to requirements. In the meantime, the below article will highlight what companies can expect and how they can prepare for what is to come.

What is covered in this proposal?

This proposal places the responsibility on companies to identify, end, prevent, mitigate and account for negative human rights and environmental effects within a company’s operations, subsidiaries and supply chains inside and outside Europe.

Specifically, the directive will:

  1. Improve corporate governance practices to better integrate risk management and mitigation processes of human rights and environmental risks and impacts, including those stemming from value chains, into corporate strategies
  2. Avoid fragmentation of due diligence requirements in the single market and create legal certainty for businesses and stakeholders as regards expected behaviour and liability
  3. Increase corporate accountability for adverse impacts, and ensure coherence for companies regarding obligations under existing and proposed EU initiatives on responsible business conduct
  4. Improve access to remedies for those affected by adverse human rights and environmental impacts of corporate behaviour
  5. Being a horizontal instrument focusing on business processes, applying also to the value chain, this directive will complement other measures in force or proposed which directly address some specific sustainability challenges or apply in some specific sectors, mostly within the Union

Which practical business solutions will be needed to comply with the directive?

  1. Full understanding and oversight of your business’ entire supply chain
  2. Due diligence procedures for mitigating human rights and environmental impacts, integrated into company strategies and policies
  3. Devise and implement clear corporate plans for the prevention and remediation of adverse impacts within the supply chain
  4. Create and maintain a clear climate change policy consistent with Paris Agreement goals
  5. Provide a grievance mechanism that is easily available to those who may be affected by human rights and environmental abuses

Who will be responsible for enforcing the directive?

Enforcement of the directive will primarily fall to the EU’s member states and the authority each member assigns to investigate and rule on any infractions.

Individual businesses will be legally responsible for conducting all due diligence of its supply chain and performing corrective actions for any non-compliances.

Why is it so important for my company to comply?

With this proposed legislation, anyone who has been negatively impacted by an instance of non-compliance will have the ability to bring the offending company to court in an UE member state if it can be shown the company’s business practices failed to prevent the non-compliance.

Under the directive, company directors will also be held personally responsible for including any human rights and environmental concerns in their decision making. Companies will need to proactively assess all facets of their business for any areas of non-compliance targeted by this directive.

How would this affect me as a small or medium sized business (SME)?

While companies that do not meet the employee and revenue thresholds outlined above are exempt from the due diligence requirements, these companies will still feel some of the burden of the larger companies performing supply chain deep dives. If your business supplies materials or finished products to any of the larger companies directly impacted by this directive, you can reasonably be expected to provide proof of oversight of your own supply chain and any potential risks. The consequences to these companies and their directors will be too great to risk ignoring even the smallest of business partners.

When could this directive be implemented and why should I start preparing now?

The proposal is on its way to the European Parliament and the Council for review. Once the new law is adopted, businesses will have two to three years to implement their plans.

While this directive may not become enforceable for two to three years, the sheer scale of companies performing due diligence checks on their entire supply chain including any business partners is enormous. Developing prevention and mitigation procedures for human rights and environmental abuses and incorporating them into your business now will allow you to better manage resources and be less disruptive to your day-to-day business.

Let IETP help you prepare

Todd Merton

Through its Factory Certification Process, IETP has unrivalled experience and knowledge of the identification, prevention and remediation of human rights abuses. As the only specialist organisation offering certification to your suppliers, you can have peace of mind that your associated factories have been thoroughly inspected and any non-compliances closed. Our Connect Platform provides all audit data at your fingertips with the ability to run required reports to satisfy any compliance reporting needs with the click of a button.

This new Directive proposal will require companies to look further into their supply-chain than Tier 1 suppliers, and IETP is well positioned to provide you with the tools required to achieve this oversight. Our Social Impact and Environmental Assessment tools will enable you to develop the appropriate management systems and identify risks for any size of supplier or vendor within your supply chain.

One of the main tenets of the proposal is to provide a grievance mechanism which is easily available to those who may be affected by human rights and environmental abuses. IETP has been operating a Worker Helpline in China for over 10 years and have recently expanded this to Vietnam. The helpline, which all certified factories are required to promote, is monitored by trained IETP staff with all confirmed non-compliance cases investigated and remediated. As an IETP Member, your company will have access to your connected factories helpline data through our Connect Platform.

Click here to learn how these programmes can help you prepare and improve your adaptability to the proposed Due Diligence Directive or to contact us directly for consultation.

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