The Corporate Sustainability Due Diligence Directive (CSDDD) introduces significant new responsibilities for sustainable procurement professionals, requiring a comprehensive approach to managing supplier relationships and reducing scope 3 carbon emissions. This article outlines essential strategies and considerations to help procurement teams navigate these changes and ensure compliance while fostering a more sustainable and ethical supply chain.
On Friday 24th May 2024, the European Union officially enacted the Corporate Sustainability Due Diligence Directive (CSDDD) after four years of negotiations, marking the final step in the decision making process. This new directive aims to unify the standards and procedures for businesses to evaluate and manage the human rights and environmental impacts within their operations and supply chains. It also clearly lays out the liabilities linked to these obligations, and the penalties that non-compliant businesses will face. Unlike the individual regulations previously adopted by countries such as France and Germany, the CSDDD seeks to standardise these requirements across all EU member states.
For professionals in sustainable procurement, this directive marks a significant transformation in what managing supplier relationships will need to look like in the coming years, and represents a major shift away from current sustainability practices.
While the directive’s final scope is narrower than initially proposed, it will still apply to European companies with over 1,000 employees and €450 million in annual turnover, as well as non-EU companies generating the same amount in European sales. Member states have two years to implement the necessary regulations and administrative procedures to comply with the directive.
The application of the directive will be phased based on company size as follows:
Affected companies must implement a risk-based system to monitor, prevent, or address human rights and environmental harms as outlined in the directive.
Specifically, companies must ensure compliance with human rights and environmental standards throughout their operations, including those of subsidiaries and business partners. In the event of violations, companies are required to take appropriate measures to prevent, mitigate, or remedy adverse impacts. They will be held liable for any damages caused and must provide full compensation. Additionally, companies must adopt and implement a climate transition plan in accordance with the Paris Agreement on climate change.
Non-compliance with the CSDDD can lead to significant penalties, including fines up to 5 percent of a company’s global annual sales. Additionally, European courts could hold companies liable for damages that could have been prevented with adequate due diligence, allowing affected individuals to seek compensation.
Sustainable procurement professionals, whose primary responsibility is managing supplier relationships to reduce scope 3 carbon emissions in the value chain, will need to address several critical aspects under the Corporate Sustainability Due Diligence Directive (CSDDD).
Here are key considerations and actions they should plan for:
Plan for cross-functional collaboration: Integrate human rights considerations with environmental initiatives. This involves breaking down silos both within the procurement function and between the company and its suppliers, and fostering cross-functional teams that can work on both sustainability and human rights due diligence. The implementation of the right software platform to help manage relationships will be crucial for ongoing supplier collaboration.
Develop comprehensive policies: Update or create policies that encompass both environmental and human rights standards, ensuring suppliers are aligned with these integrated expectations.
Adopt a community-focused approach: Shift the focus of risk assessments from the company to the communities and ecosystems affected by operations, making sure to engage with suppliers in areas where they have local knowledge. This means identifying and prioritising the most severe and likely impacts on local populations.
Enhance supplier engagement: Build and maintain long-term relationships with supplier communities to better understand and address their concerns and risks. This may involve regular consultations and collaborations, and if done well, could even lead to innovation initiatives between companies and suppliers.
Develop mitigation plans: Create detailed action plans to mitigate identified risks, particularly those related to human rights and environmental impacts. This includes proactive measures to prevent child labour, environmental degradation, and other issues, in collaboration with the suppliers who will be ultimately be responsible for on-the-ground management. Over time this should go down to several supplier levels to ensure clear and thorough visibility of all activity within your value chain.
Implement remediation measures: Establish clear protocols for addressing violations when they occur. This could involve direct remediation actions and support for affected communities or workers.
Strengthen supplier relationships: Engage with suppliers to ensure they understand and comply with the new requirements. This includes providing training, resources, and support to help them meet these standards.
Monitor compliance: Develop robust systems for ongoing monitoring and assessment of supplier compliance with the CSDDD. Use tools and technologies to track performance and identify potential risks early.
Align with climate goals: Ensure that suppliers have climate transition plans aligned with the Paris Agreement. This involves setting clear targets for reducing carbon emissions and tracking progress.
Collaborate on emission reductions: Work with suppliers to identify opportunities for reducing scope 3 emissions. This could include initiatives such as improving energy efficiency, switching to renewable energy, and optimising logistics.
Understand legal implications: Familiarise with the legal obligations and potential liabilities under the CSDDD. Ensure contracts and agreements with suppliers reflect these new requirements and protections.
Prepare for financial impacts: Plan for the financial implications of non-compliance, including potential fines and compensation costs. Develop a budget and financial strategy to address these risks.
Enhance transparency: Improve sustainability reporting practices to not only meet disclosure requirements but also demonstrate tangible actions and impacts. This includes detailed reporting on efforts to mitigate and remediate human rights and environmental risks.
Document due diligence efforts: Maintain thorough documentation of all due diligence activities, including risk assessments, mitigation plans, and stakeholder engagements. This will be crucial for demonstrating compliance and defending against any potential legal actions.
Invest in training: Provide training for procurement teams and suppliers on the new directive’s requirements and best practices for compliance. This should cover both human rights and environmental due diligence.
Develop internal expertise: Build internal expertise on sustainability and human rights issues to ensure the team can effectively manage and support compliance efforts.
Sustainable procurement professionals will need to integrate these new due diligence requirements into their supplier management practices. This involves collaborating closely with suppliers and business partners to ensure compliance, developing robust risk assessment and mitigation strategies, and preparing for potential liabilities. Additionally, companies must be proactive in adopting climate transition plans, aligning their operations with the broader goals of sustainability and social responsibility.
The Corporate Sustainability Due Diligence Directive represents a comprehensive framework aimed at fostering a more sustainable and just global economy. By understanding and implementing its requirements, procurement professionals can significantly contribute to this transformative effort.
