The Corporate Sustainability Due Diligence Directive ((EU) 2024/1760) (the Directive) comes into force on 25 July 2024 and introduces new obligations to address social, environmental and governance risks in supply chains. The Directive applies directly to large EU companies and non-EU companies that trade in the EU.

In this article, we explain how the Directive will impact UK-based organisations and what this means for supply chain due diligence in a global economy.

New requirements

At its core, the Directive requires EU and non-EU companies to integrate due diligence into their polices and risk management systems which identify, assess and mitigate actual or potential adverse impacts on human rights and the environment throughout their chain of activities.

In practice, they will be required to:

• monitor the effectiveness of their due diligence (at least once every 12 months);
• develop a code of conduct for direct business partners (which must be reviewed and updated at least every 24 months);
• mitigate actual or potential adverse impacts through corrective action plans, 
• establish and maintain a notification mechanism and complaints procedure to allow people to report legitimate concerns regarding actual or potential human rights and environmental adverse impacts;
• provide remediation for actual adverse impacts;
• publicly communicate due diligence in their corporate reports and on their website.

The Directive recognises the private sector plays an important role in promoting sustained, inclusive and sustainable economic growth whilst, at the same time, it is in the interests of companies to protect human rights and the environment. By imposing these new due diligence requirements and reporting obligations, the Directive intends to change the way in which companies produce and procure, achieving a more sustainable and just social market economy.

Impact on UK-based entities

The Directive applies directly to UK companies and partnerships that, with respect to their own operations or the operations of their subsidiaries:

• generated at least EUR 450 million net turnover in the last financial year (regardless of the number of their employees);
• have franchising or licensing arrangements in the EU that generated either EUR 22.5 million in royalties or EUR 80 million net turnover in the last financial year.

The Directive will also have an impact on UK organisations that fall outside the scope of the Directive. EU-based partners will need to report on and will seek assurances from their global value chain, regardless of where the activity occurs. 

When assessing risk factors, EU-based partners may take account of the fact that UK-based entities are not covered by the Directive: applying greater scrutiny and requesting more evidence to show there are no actual or potential adverse human rights and environmental impacts created by the UK operations.

The Directive instructs EU-based companies to influence and improve standards of living throughout their supply chain by making appropriate financial or non-financial investments, adjustments or upgrades which aim to prevent adverse impacts. UK-based partners that may find it harder to access opportunities where procurement, employment and purchasing decisions are dependent on satisfying new codes of conduct and sustainability requirements.

Suppliers, customers and funders, will all come to expect a higher standard of due diligence when engaging with EU-based companies and are likely to demand the same of UK-based organisations (the peer pressure factor). The Directive explicitly acknowledges the rising concerns of consumers and investors regarding these topics and aims to give stakeholders real influence over the private sector’s impact on social, environmental and governance risks.

Enforcement action

Companies subject to the Directive are tasked with providing remedies where they have caused or jointly caused an actual adverse impact. EU Member States shall impose fines which are proportionate to the consolidated turnover of the ultimate parent company, whilst victims of the adverse impact will be entitled to sue for damages and seek injunctive relief.

UK-based organisations should expect to see financial liabilities for fines and remedial action flowed down to them in their contract terms so that the risk of adverse impacts is reasonably allocated between the parties. Non-compliance may also affect a company’s access to EU public procurement. 

Time to prepare – get your house in order

Supply chains continue to present a commercial and reputational risk. Increasing stakeholder pressure will mean that UK-based entities will need to take appropriate measures which support the objectives of the Directive, even if they are not directly subject to it.

In due course, member states are expected to produce guidance and model contractual clauses to help companies prevent adverse actual impacts and bring adverse impacts to an end. We can expect that large UK-based companies operating within the EU or trading with large EU companies will be subject to enhanced scrutiny and required to provide specific warranties relating to social, environmental and governance risks.

UK-based companies should act now to:

• map their operations (and those of their subsidiaries) to identify, assess and reduce potential adverse human rights and environmental impacts;
• consider what digital tools and technologies might reduce the cost of data gathering, identifying, assessing and managing the supply chain;
• develop an ESG code of conduct that can be enforced against internal and external stakeholders;
• consider whether enhanced assurance schemes such as B-Corp accreditation can provide the right framework for promoting sustained, inclusive and sustainable economic growth;
• integrate supply chain due diligence into standard contracts and relevant policies;
• develop appropriate channels, through which stakeholders can raise concerns about the organisation’s chain of activities (whistleblowing and complaints policies).

If you would like assistance with corporate sustainability and demonstrating effective supply chain due diligence, get in touch.