The proposed EU supply chain law has not only raised eyebrows within Europe but also among representatives of foreign companies and the US government. This is mainly due to the multitude of regulations that need to be considered.
In February 2022, the European Commission proposed a directive on new corporate sustainability due diligence (CSDDD). The directive aims to hold companies accountable for their impacts on human rights and the environment. This would apply both to large EU firms and foreign companies active within the EU, potentially making them liable for human rights or environmental violations throughout their supply chain.
The impending law, currently under negotiation between the European Parliament and EU member states with hopes of reaching an agreement by next spring, is causing significant concern for companies outside the EU.
Corporate Concerns
The law might even affect companies with no direct ties to the EU, Scévole de Cazotte, Vice President of International Initiatives at the US Chamber Institute for Legal Reform, told EURACTIV.
De Cazotte criticized the extraterritorial reach of the EU’s draft law, suggesting its scope should be limited to minimize impacts, for instance, on US businesses. He noted that the US and other foreign nations might take retaliatory actions or introduce their own regulations, even potentially targeting EU companies or re-evaluating trade agreements.
In June, US Treasury Secretary Janet Yellen had already voiced concerns about the law’s effects, stating, “We are closely examining the EU corporate sustainability directive and are concerned about potential impacts on US companies. We’re communicating with the EU and highlighting our concerns about the directive’s extraterritorial scope.”
De Cazotte also emphasized the lack of a clause ensuring complete harmonization, which would prevent EU states from implementing stricter rules than described in the EU directive. “While we support the goals, inconsistent implementation might complicate and risk the business environment,” he said. He also expressed concern about significant discrepancies in the EU internal market.
However, US companies are not the only ones apprehensive
“It’s a huge task for businesses like our members to adjust to slightly different EU state legislations,” said Yukako Kinoshita from the Japan Business Council in Europe (JBCE).
“It’s also essential to align with international standards,” she added, pointing to guidelines like the UN’s guiding principles for business and human rights, which many businesses have adhered to.
During its discussions on the directive, the European Parliament tackled the issue of harmonization. An internal market clause was introduced to ensure member states coordinate their efforts in transposing the directive into national law. However, it remains uncertain if this aspect will remain after negotiations.
Cautious Optimism from NGOs
Civil society organizations, advocating for the rights of individuals in third countries, however, are cautiously optimistic about the draft EU directive.
According to Giuseppe Cioffo, an advocate for corporate regulation at the CIDSE social justice network, the EU law could finally address “exploitative practices conducted by some European or local companies within European supply chains.”
Cioffo referred to incidents like the collapse of the Brumadinho dam in Brazil in 2019, shortly after its certification by German company TÜV Süd, killing 270 people.
Activists view the proposed participation of affected parties in the draft law as a “promising element,” since local communities are key in understanding risks and potential impacts. However, they also pointed out inadequate accompanying measures primarily targeting corporate support.
“We have limited resources, and there are projects aimed at raising awareness and educating locals about the law,” Cioffo explained.
Furthermore, NGOs fear the proposal might eventually reduce to mere checklist ticking and could limit access to justice for corporate misconduct victims.
“There are still barriers in accessing justice, including proving claims,” stated Johannes Blankenbach, a researcher at the Business and Human Rights Resource Centre, speaking to EURACTIV. “If this [is weakened during current negotiations], the law might lose its effectiveness,” he added.
Liability for Non-compliance Damages
The law’s included liability provisions, which could hold companies accountable for damages caused by their business partners or subsidiaries in third countries, remain controversial.
While the European Parliament’s Committee on the Internal Market and Consumer Protection (IMCO) has suggested strengthening liability for neglecting due diligence, the Legal Affairs Committee (JURI) recently proposed restricting it to damages caused by companies and their EU subsidiaries.
Such a move would significantly weaken the EU law since many human rights and environmental standard breaches occur in third countries.
“That would indeed be a step backward,” Cioffo remarked. “Without these components, the law would lose its significance.”
However, there’s broad support for the law within the European business environment.
“Many of our members have long been active in supply chain due diligence and view the EU law as an opportunity to ensure clearer framework conditions,” Thomas Tillemans, Head of Corporate Responsibility at CSR Europe, told EURACTIV.
“There are undoubtedly concerns, but most companies see this more as an opportunity than a barrier,” he added.
Challenges for EU Legislators
Negotiations on the EU supply chain law will commence this fall, concluding a first reading before resuming in a second reading next spring.
Legislators face numerous challenges, including harmonizing company requirements across different member states and determining the extent of corporate liability for their business partners and subsidiaries in third countries.
Some EU member states have already introduced national supply chain laws, while others are still waiting. These national laws are expected to undergo revisions to align with the new EU regulations.
The EU Parliament, Council, and Commission will be intensely negotiating in the coming months to find a compromise meeting both corporate demands and civil society expectations.
Companies outside the EU operating within Europe will be closely monitoring these negotiations, hoping their concerns are considered while also preparing for the new rules’ implementation.
The EU supply chain law is a significant step towards a more responsible economy and could serve as a global model. However, it remains to be seen how effective it will be in practice and whether it can genuinely prevent human rights violations and environmental damages along supply chains.
There’s no doubt that, once in effect, the law will significantly influence EU and even global business practices. It will be crucial for companies to proactively adjust to the new regulations and ensure they meet their supply chain due diligence. At the same time, it will be vital for EU legislators to strike a balance between corporate demands and civil society expectations.