What is the EU legislation promoting sustainable business?
As a forerunner in sustainability, the EU has introduced several legislative acts, including the Corporate Sustainability Reporting Directive (CSRD), the Carbon Border Adjustment Mechanism (CBAM) and the Corporate Sustainability Due Diligence Directive (CSDDD). These legislations aim to drive reductions in carbon emissions and ensure respect for human rights across global supply chains. While these legislations may pose some initial challenges, they also present significant opportunities for businesses to improve their sustainability performance and gain a competitive edge in the EU market.
What do businesses need to know about CSRD?
The Corporate Sustainability Reporting Directive (CSRD) mandates that large businesses operating in the EU (or with significant subsidiaries within the bloc) disclose comprehensive information about the sustainability of their operations and strategy and demonstrate progress towards the commitment to transition to carbon neutrality made by all countries under the Paris Agreement. It requires all large businesses and listed SMEs to publish reports on their activities in ESG (environmental, social, and governance) terms according to the European Sustainability Reporting Standards (ESRS) and to move toward integrating sustainability metrics into financial statements.
CSRD updates and replaces the EU’s Non-Financial Reporting Directive (NFRD) and expands mandatory non-financial—i.e., ESG—reporting from a broader range of businesses than before to go beyond measuring financial risk and include businesses’ impact on the world around them. Significantly, it requires businesses within its scope to map, engage with, and report on the effects of partner businesses throughout their value chains. This means that businesses whose size or location would exclude them from full mandatory reporting will still need to provide data under the CSRD and ESRS to comply with the requirements of their in-scope clients and partners.
The CSRD directive guides its due diligence efforts using internationally recognised frameworks, such as the OECD Guidelines for Multinational Enterprises for Responsible Business Conduct and the UN Guiding Principles on Business and Human Rights.
What do businesses need to know about CSDDD?
The Corporate Sustainability Due Diligence Directive (CSDDD) was adopted by the European Commission on February 23, 2022, and accepted by the EU’s member states in the European Council on March 15, 2024. Its main goal is to ensure businesses are accountable for their role in promoting sustainable development worldwide, focusing on human rights and environmental protection within business operations and management. This directive essentially enacts and enforces existing but non-binding international commitments under the United Nations Global Compact in EU law.
The directive requires large businesses to disclose their potential environmental and human rights impacts across their operations, supply chains, and subsidiaries. It applies to EU businesses with over 1000 employees and a net turnover of €450 million and non-EU entities with a similar turnover generated in the Union. The implementation period will be 3 to 5 years and will roll out in stages based on the business’s size. It is expected that around 5,400 businesses in the EU will need to comply with these reporting requirements.
The CSDDD guide due diligence efforts by drawing upon internationally recognised frameworks, such as the OECD Guidelines for Multinational Enterprises for Responsible Business Conduct and the UN Guiding Principles on Business and Human Rights.
What do businesses need to know about CBAM?
The Carbon Border Adjustment Mechanism (CBAM), which already came into effect on October 1, 2023, is designed to counter the risk of so-called “carbon leakage” and operates by imposing a charge on the embedded carbon content of certain imports. Carbon leakage occurs when businesses move carbon-intensive production abroad to countries with less stringent climate policies or when more carbon-intensive imports replace local products. CBAM aims to put a fair price on the carbon emitted while producing carbon-intensive goods entering the EU and encourage cleaner industrial production in non-EU countries. It ensures that the carbon price of imports is equivalent to the carbon price of the domestic output so the EU’s climate goals are not compromised.
The CBAM will be fully implemented in 2026, and until then, a transitional phase is in effect from 2023 to 2026. This gradual introduction aligns with the phasing-out of free allowances under the EU Emissions Trading System (ETS) to support the EU industry’s decarbonisation.
What must the supply chain do to comply with EU sustainability legislation?
Businesses should know what legislation is available and who to comply with. CSRD, CSDDD, and CBAM legislations are in place to ensure supply chain sustainability. To comply with EU sustainability legislation, businesses should implement robust ESG reporting processes aligned with frameworks like the Global Reporting Initiative (GRI) or European Sustainability Reporting Standards (ESRS). They must also prepare for sustainability audits as required by the CSRD.
Due diligence measures are essential to identifying and mitigating negative human rights and environmental impacts. Businesses should adopt internationally recognised frameworks such as the OECD Guidelines and the UN Guiding Principles on Business and Human Rights.
Additionally, businesses should assess and reduce their carbon footprint by investing in cleaner production methods. understanding these regulations can be challenging, especially for SMEs, but adopting these strategies helps ensure compliance.
What must the supply chain do to comply with CSRD legislation?
Businesses should proactively ensure robust ESG reporting processes to comply with the CSRD. They should consider adopting existing internationally recognised frameworks—for example, the Sustainable Development Performance Indicators (SDPI)or the Global Reporting Initiative (GRI) standards—and aligning them with or adopting the European Sustainability Reporting Standards (ESRS) to guide their reporting efforts. They should also prepare to be audited on what they report, as the CSRD introduces the assurance requirement, sustainability auditing.
What must the supply chain do to comply with CSDDD legislation?
Businesses should implement and prepare to participate in due diligence measures that help identify, end, prevent, mitigate, and account for adverse human rights and environmental impacts. Adopting one of the robust and internationally recognised ESG reporting frameworks mentioned above will provide businesses with high-quality documentation that can help with the due diligence compliance and auditing process. To guide their due diligence efforts, businesses should also consider adopting internationally recognised frameworks such as the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
What must the supply chain do to comply with CBAM legislation?
Businesses should assess the carbon footprint of their products and supply chains to identify areas for reducing their carbon emissions. They should also consider investing in cleaner production methods and technologies.
Besides CBAM, CSRD, and CSDDD, many other legislations are also relevant to sustainable business practices for businesses in the EU market’s supply chain. My colleague Haritha Mukundan has written a blog entitled ‘Sustainability reporting in 2024: what businesses need to know’ that is also worth reading for an overview of the evolving landscape of EU sustainability legislation and policy.
Understanding and implementing actionable measures to align with EU legislation within the global supply chain can be challenging, especially for SMEs. The following section offers strategies to help businesses navigate these compliance challenges effectively.
How can businesses and SMEs in the global supply chain overcome challenges posed by the EU’s sustainability legislation?
Businesses in the global supply chain need to be proactive to avoid negative impacts from CBAM, CSRD, and CSDDD requirements. Here is a step-by-step strategy businesses can apply to take coherent action and comply with the wide range of EU legislation.
- Understand and align with legislation’s requirements: Businesses must understand the scope, reporting requirements, and timelines for compliance with the relevant legislation.
- Adopt ESG reporting and prepare to be audited: ESG reporting and auditing can help businesses understand sustainability business practices, identify gaps in reporting or due diligence efforts, and address them accordingly.
- Implement a sustainability framework: Implement a sustainability framework that aligns with international standards and guidelines.
- Engage with stakeholders: Engage with suppliers, customers, investors, and the broader society to ensure they are informed about the business’s sustainability impact and efforts.
- Invest in sustainability: Invest in sustainability initiatives and technologies to reduce carbon footprint and improve business practices.
By taking these measures, businesses of all sizes across the global supply chain can overcome the challenges posed by the EU’s sustainability legislations, such as CBAM, CSRD, and CSDDD.
What are the potential benefits of complying with the EU’s sustainability legislation?
By complying with EU’s legislation, businesses may have potential benefits in the following ways:
- Meeting EU market demands and customer expectations: As sustainability becomes increasingly essential for both B2B and B2C commerce at all levels of the EU, businesses in the supply chain of EU businesses that demonstrate excellence in applying ESG principles and a genuine commitment to sustainability will be better positioned to meet market demands and gain a competitive edge.
- Mitigating risks associated with non-compliance: Proactively adopting sustainable practices can help businesses and SMEs avoid potential risks associated with non-compliance with legislations like the CBAM, CSRD and CSDDD.
- Enhancing brand reputation: Implementing sustainable practices can improve brand image and reputation, increase customer loyalty, and attract new markets.
What technologies are available to promote transparency in the supply chain?
Many technologies and software are available to ensure transparency in the supply chain. Many technologies and software are available to ensure transparency in the supply chain, including ERP (Enterprise Resource Planning), Barcode, RFID (Radio Frequency Identification), Blockchain, and IoT (Internet of Things). These technologies are widely used to enhance visibility and efficiency throughout the supply chain process. ERP, Barcode, RFID, Blockchain, and IoT are widely used technologies and software.
