June 10, 2023 | Supply Chain Strategy
The landscape of corporate sustainability management is about to undergo a seismic shift with the introduction of the EU Corporate Sustainability Due Diligence Directive. Passed on June 1, this legislation transforms sustainability management from a voluntary practice into a legal requirement with far-reaching effects on companies.
The EU Corporate Sustainability Due Diligence Directive applies to companies with over 500 employees and more than €150 million in revenues. In the future, companies with 250 employees and €40 million in revenue will also be included. Additionally, non-EU companies that earn revenues in the EU above the specified thresholds will be required to follow the rules, making this legislation globally significant.
Failure to comply with the directive carries severe penalties, including the removal of a company's goods from the market and fines of up to 5% of its global revenues. Non-EU companies could even face a ban on participating in EU public procurement activities. These consequences underscore the seriousness with which sustainability is now being regarded and highlight the imperative for companies to take immediate action.
The directive mandates that companies identify and mitigate human rights and environmental impacts throughout their value chains. This means evaluating not only tier 1 suppliers but also those further down the value chain. For large companies with over 1,000 employees, the achievement of climate transition plan targets will be linked to directors' bonuses, creating strong incentives for effective action.
To comply, companies must implement climate transition plans aimed at limiting global warming to 1.5 degrees Celsius across scopes 1, 2 and 3 emissions. They must also establish climate impact due diligence processes. This requires investment in technology to collect data directly or manage suppliers' compliance with disclosure programs such as the Carbon Disclosure Project (CDP). Additionally, companies will need technology that can track the success of their value chain in reducing scope 3 emissions, ensuring alignment with their climate transition plans.
Operationalizing the requirements of the directive poses significant challenges for companies. The sheer scale of mapping a company's value chain, encompassing potentially hundreds of thousands of suppliers when considering tiers beyond the immediate level, makes a manual approach impractical.
Investment in technology becomes essential to streamline data collection, manage supplier compliance, and track emissions reductions effectively. Such technological solutions will also help companies rethink their governance structures to account for environmental, social, and governance (ESG) risks. Changes to procurement and supply chain operating models may be necessary to ensure compliance with the directive and manage associated risks effectively.
Moreover, budgeting considerations must extend beyond financial terms alone. Scope 3 emissions reduction targets should become a focal point to achieve climate transition plans successfully. By incorporating emissions reduction goals into budgetary planning, organizations can align their financial strategies with their sustainability objectives.
The EU Corporate Sustainability Due Diligence Directive marks a significant turning point in sustainability management, making it a legal obligation with severe consequences for non-compliance. Supply chain and procurement professionals must recognize the broad implications this directive holds for their organizations. Embracing technology, reevaluating governance structures and incorporating emissions reduction targets into budgeting practices will be key to meeting the directive's requirements and ensuring a sustainable future.
By proactively adapting to this new regulatory landscape, supply chain and procurement professionals can position their organizations as leaders in corporate sustainability, driving positive change throughout their value chains and contributing to a more sustainable world.