The Corporate Sustainability Due Diligence Directive (CS3D) has just passed its final hurdle in the process to becoming law. EU Member States now have two years to transpose it into national law. The implications will be felt along global value chains long before those laws take effect, however, particularly by the micro-, small- and medium-size enterprises (MSMEs) that populate those chains.
There has been lots of discussion about whether CS3D will be a burden for SMEs and farmers, especially smallholders. Advocates of the Directive have insisted that it won’t since only large companies fall within the scope of the CS3D. The reality is not that simple. There will be a real burden on many MSMEs in the chain of activities of those in-scope countries, and there is a real risk that the burden will not be shared.
Why?
Because every step in the due diligence process that the big in-scope companies must report on involves information and data they can only get from the companies spread along their chain of activities, and most of those are small. From risk identification to prevention and/or remediation of adverse human rights and environmental impacts, the action is in the value chain.
The CS3D expects in-scope companies to add language to their sourcing contracts setting human rights and environmental conditions for suppliers to meet and requiring those suppliers to pass them on to their suppliers in turn, all the way to the raw materials at the start of the production process. Once all these policies and procedures are in place, those suppliers should detail their performance so that the in-scope lead companies can report on their due diligence compliance.
Everything from the prevention of child and forced labour to the reduction in greenhouse gas emissions will have to be implemented, monitored and reported by MSMEs, possibly for the first time.
The drafters of the CS3D were aware of the possibility of unintended consequences of the new law. In-scope companies could shift the responsibility for the identification, prevention and/or remediation of adverse impacts onto their suppliers, along with the associated compliance costs, without adjusting any of the other terms and conditions, like price. Suppliers would have to invest in new systems, technology and training but buyers would not increase the price paid for the product. Those costs of compliance could be paid by workers in the end.
Smallholder farmers and artisan producers would be hit hardest since many cannot afford to install and operate the systems required to demonstrate compliance, resulting inevitably in exclusion from global value chains.
The CS3D makes it clear that in-scope companies must ensure that any due diligence conditions they pass on to their business partners and suppliers are fair and reasonable, and that the counterparts have the ability and capacity to meet them. If not, the in-scope company should provide the necessary support to enable their business partners and suppliers to meet the expectations of the CS3D. That enabling support could include expertise, systems, finance and sourcing arrangements that facilitate success. The Directive does provide guidance to ensure that the transfer of responsibilities from in-scope buyer to business partners and suppliers is equitable, but there is no test to determine that. In-scope companies will therefore interpret this obligation according to their existing business model and procurement and sourcing practices. Given the predominance of transactional relationships in procurement and sourcing it is quite likely that due diligence duties will be shifted onto suppliers.
It is not at all clear how the Commission or national supervisory authorities will ensure that the obligations are shared in a fair and responsible manner, but the implication is that MSMEs along the value chain have two years to tool-up to meet the requirements of in-scope companies.
So, what can responsible companies do?
Contact us at info@equiception.net for a demo of our due-diligence–as–a–service platform that enables you to trace your chain of activities, assess the readiness of your business partners and suppliers, identify risks, and build supplier capacity to manage them. We also have guidance and tools to help you, your business partners and suppliers upgrade the systems necessary to conduct effective due diligence and stakeholder engagement.
This content has been prepared by Equiception for informational purposes only and does not constitute legal advice. Readers should contact a legal or professional advisor before taking decisions on any of the matters discussed herein. We make every effort to ensure that the content is accurate and up to date, but situations evolve and the content may need to be updated accordingly. Equiception cannot be held liable for any errors or omissions it might contain.