unyer
07/10/2024

Supply Chain Act: Companies under the lens of sustainability and human rights

On 5 July, the Corporate Sustainability Due Diligence Directive (CSDDD), also known as the Supply Chain Act or, more technically, Directive (EU) 2024/1760 of 13 June 2024, was published in the Official Journal of the European Union. This directive represents a crucial step in promoting corporate sustainability and holding businesses accountable for their social and environmental impacts throughout their supply chains. In fact, following the Corporate Sustainability Reporting Directive (CSRD), entered into force on 5 January 2023, which imposed new and more demanding ways of conducting sustainability reports for larger companies, the CSDDD introduce an obligation for companies of a certain size to identify and mitigate – through careful and thorough due diligence – adverse impacts on human rights (such as child labour) and the environment (such as pollution) in their own operations, those of their subsidiaries and those of suppliers and sub-suppliers included in their business relationships, i.e. their supply chain.

The innovative scope of CSDDD Directive was recognised even before its entry into force, such that the European legislator was obliged, given the numerous objections from the Member States, to provide for its gradual application, proportionate and therefore inextricably linked to the size of the companies subject to its implementation: as of 26 July 2027, companies with more than 5,000 employees and a turnover of more than EUR 1,500 million; from 26 July 2028, companies with more than 3,000 employees and a turnover of more than EUR 900 million; and finally, from 26 July 2029, all other companies falling within its scope (i.e. those with more than 1,000 employees and a turnover of more than EUR 450 million).

Until recently, the lack of adequate and effective control over the supply chain allowed companies to remain passive, as there was no concrete reason, either from an economic or a productivity point of view, for them to monitor the performance of their suppliers and subcontractors in terms of compliance with human rights and environmental standards. This state was due to the absence of a real supply chain management and control system, which was limited to the signing of ethical codes and superficial, often cursory audits, instead of a real risk management system covering the entire chain and aimed at effectively monitoring suppliers in order to support them, both economically and in terms of know-how, on their way towards a more sustainable business model.

With the entry into force of the European Directive, large companies (and, consequently, the SMEs involved in their supply chain) will first have to carefully map the risks affecting the supply chain, necessarily involving all stakeholders, and provide appropriate training on CSDDD issues to all employees. In addition, at the documentary level, companies will be required to produce annual reports focusing on the impact of their activities on the environment, human rights and related risks.

These obligations will enable companies to adopt a sustainable and transparent business strategy that, although considerably burdensome in the short term, will bring significant benefits in the long term.

Each Member State will set up a specific supervisory authority with the power to carry out inspections, impose significant fines – up to 5% of the company’s total net turnover, plus compensation for any damage caused – and, in the event of non-compliance, issue public statements indicating responsibility and breach, with obvious negative repercussions on the reputational profile of the company involved.

Transparency, a culture of legality and competitive input will form the basis of the Supply Chain Act, with a commitment from companies to adopt appropriate compliance, accompanied by adequate contractual protection and negotiating safeguards – especially in the most commonly used types of contract in this fields, such as for contracting and subcontracting agreements – together with the creation of a competitive market favourable to SMEs, whose sustainable policies will be preferred to the selection of low-cost, foreign or socially and environmentally dumping suppliers.

Francesco Lamperti

Business Case