Corporations to address sustainability risks of their business under new EU guidance

‍EU's biggest companies will have to manage the risks of serious human rights and environmental impacts under a recently proposed European directive on due diligence, presented by the European Commission at the end of February. Due diligence is a flexible tool that gives companies guidance on how to identify and proportionately address major issues such as child and forced labour or systematic deforestation in their supply chains. The legislation will help level the playing field for domestic producers and responsible companies that are not associated with negative impacts or already address them.

On 23 February 2022, the European Commission presented its proposal for a Corporate Sustainability Due Diligence Directive (CSDDD), which aims to ensure that companies identify and seek to prevent serious human rights and environmental impacts in their operations and supply chains. The draft directive gives guidance to companies on how to detect, assess and address issues proportionate to their involvement and capabilities. 

The new legislation will affect the largest companies in the single European market with more than 500 employees and revenues of more than EUR 150 million. It will also apply to large companies with more than 250 employees that operate in high-risk sectors such as agriculture, apparel or mining. Small and medium-sized enterprises are not included. 

The ambition of the proposed Directive is to address - through implementing due diligence - serious human rights and environmental problems such as forced labour, child labour in agriculture, like for example in cacao harvesting, the destruction of the Amazon and Indonesian rainforests, or forced displacement of people in the context of mining projects.

A level playing field for domestic producers and risk-based requirements

One of the objectives of the Directive is to set a level playing field for domestic producers and responsible companies with global supply chains. "Companies producing in the EU have higher costs compared to their competitors using production outside Europe, where there are not the same labour and environmental standards applied. The introduction of due diligence will mitigate this disadvantage," explained Filip Gregor, Head of Responsible Companies Section at Frank Bold. The directive could thus create a level playing field for the European clothing and outdoor equipment manufacturing or steel sector. "The legislation is based on the principle of appropriateness, the requirements are always based on risks a company faces. For many companies, the implementation of due diligence will consist of an analysis of the material risks and imply minimal costs," clarified Gregor. 

The due diligence process is particularly relevant for companies relying on the production outside the European Union, especially in risky geographic areas and sectors such as textile production in Southeast Asia. For example, if a company trades risky commodities such as palm oil or cotton, it needs to proactively screen and engage with its suppliers. 

Current business experience shows that the additional costs of implementing due diligence are manageable for companies and effects on consumers are negligible. For example, if the wages of cocoa farmers in Ghana and Ivory Coast were increased to a living wage level (and therefore children did not have to work on the plantations), it would mean that the average price of a milk chocolate (0.89 euros) would increase by only 5 cents.

The experience of companies that have already implemented due diligence demonstrates that due diligence brings them a number of benefits, such as more trustworthy relationships with suppliers and greater resilience to crises.”Even in the pandemic, we had stable supply chains and we could find solutions with our suppliers when they struggled with the covid-19 impacts. We can clearly show that sustainability leads to economic success,” said Bettina Roth, Head of Quality Management & CSR Supply Chain at apparel company Vaude. 

Reducing greenwashing and improving access to finance

The draft directive also has an important role to play in the Green Deal and the green transformation of the European economy, which will be supported by EUR 500 billion annually from investors and banks. Companies wishing to access this green finance need to comply with due diligence rules, among other things. "It's not just about the EU, capital markets in the US and in most developed countries are increasingly focusing on non-financial indicators and assessing their investments accordingly. We know from our business experience that investors from the US or the UK require non-financial data and due diligence assurances from companies when investing or buying services. And they do it without Green Deal legislation," said Pavel Franc, Frank Bold CEO. 

By setting out clear rules, the proposed directive will clarify the conditions for green financing and reduce greenwashing. 

The Directive will most likely be adopted in the next two years. The adoption of the EU standards on sustainability reporting is also key in this regard. These will further specify what companies should report on their due diligence process.

Additional information

CSDDD is intended to establish a common set of rules for all European companies and thus solve the current fragmented legal environment - as France, Norway and Germany have already adopted their own national due diligence legislation, which requires differing things from companies.

What we can do for you

At Frank Bold Advisory, we offer comprehensive ESG services that include due diligence. We will assess your business in relation to the emerging European ESG framework and set up the relevant processes and reporting outputs to meet the requirements of the EU Taxonomy. You will be able to provide your business partners and investors with key ESG data. We can also help to assess due diligence requirements for companies looking to issue green bonds.