Global Business and Trade

New supply chain legislation: A catalyst for sustainable development?


After some delays, on March 15, 2024, the European Council eventually passed a vote in favor of the new Corporate Sustainability Due Diligence Directive (CSDDD). This directive, intended to make supply chains more sustainable, heralds a paradigm shift.

A commentary by Miriam Wilhelm & Charlotte Both 

[Translate to English:] Miriam Wilhelm

For the first time, the CSDDD requires companies to take responsibility for the environment and human rights in their global supply chains, beyond the limits of their own individual business operations. By taking existing national supply chain laws, for example those in place in Germany and France, and harmonizing them at the EU level, legislators hope to create a level playing field for businesses (= equal rules for all). At the same time, the CSDDD also aims to leverage the economic power of companies to achieve significant and lasting improvements in the sourcing countries with respect to environmental and human rights standards.

The sustainability targets of the CSDDD are not new, however. As part of voluntary commitments, many companies already started pursuing these goals years ago, issuing sustainability reports to document the measures taken. Until now, however, the responsibility for achieving these sustainability targets has been passed on to the suppliers. Critics have pointed to what they call “responsibility avoidance,” where companies are shifting the burden of responsibility and the costs onto their suppliers. This is now bound to change in the wake of the new due diligence obligations. It will no longer be enough for enterprises to be transparent about their supply chains, because the directive requires them to make active efforts: Companies must “do their best” to identify sustainability risks in their supply chains and put in place appropriate measures to prevent and remedy these risks.

However, the effectiveness of such supply chain laws as catalysts for sustainable development is controversial. Some critics say they are paper tigers, as the additional bureaucracy involved would tie up critical resources needed elsewhere in times of multiple crises. The regulations are also criticized for placing a heavy burden especially on small and medium-sized enterprises, who would still end up holding the full responsibility for the due diligence obligations passed on to them by their customers. In this way, the new regulations could put European companies at a disadvantage in global competition.

Other critical voices warn of the unintended consequences that the new due diligence obligations could have for the sourcing countries. On the one hand, the new rules might come to be seen as a form of neocolonialism if a Western-style understanding of sustainability is imposed upon the sourcing countries. On the other hand, there are concerns that suppliers in certain emerging countries will be excluded from international value chains. In particular, resource-poor suppliers often struggle when it comes to implementing sustainability standards and could therefore be pushed out of the market. A first possible consequence could be, for example, for companies to start sourcing their goods only from large plantations and to end their business relations with small farmers. Because of risk aversion, companies might also stop their investments and trade relationships in certain regions altogether. Other companies with lower standards would jump in to fill the gap, and the situation in the respective regions would even get worse.

Yvonne Jamal made the following call to companies: “You have the power, so put it to good use!” Whether and how big enterprises will go on to use their power to improve environmental and human rights standards in sourcing countries in any substantial way based on the CSDDD remains to be seen, but the first step has been taken. It will be crucial that companies stop thinking in terms of compliance risks and competitive disadvantages and start seeing the CSDDD as a collective effort for bringing greater sustainability and justice to global supply chains.

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