The European Union has been progressively tightening its regulatory framework to ensure that sustainability and ethical practices are embedded in supply chain operations. This shift has significant implications for various stakeholders across multiple sectors. In this article, we provide a comparison of different regulatory frameworks: the Corporate Sustainability Due Diligence Directive (CSDDD), EU Deforestation Regulation, Carbon Border Adjustment Mechanism (CBAM), Conflict Minerals Regulation, and EU Forced Labour Regulation.

THIS ARTICLE IS WRITTEN BY SEFA GECIKLI ([email protected]) AND IMAN ZALINYAN ([email protected]). SEFA AND IMAN ARE BOTH PART OF RSM NETHERLANDS BUSINESS CONSULTING SERVICES WITH A SPECIFIC FOCUS ON SUSTAINABILITY AND STRATEGY.  

Obliged entities in comparison

The CSDDD focuses on large enterprises, leveraging their scale and reach to enforce sustainability practices down the supply chain. Including franchise operations particularly broadens its applicability in sectors like retail and hospitality, where franchising is prevalent. While there are more intricacies, simply putting, CSRD covers these entities:

  • Large EU Companies with over 1000 employees or a global net turnover exceeding EUR 450 million.
  • Non-EU Companies with a substantial presence in the EU market, evidenced by a global net turnover exceeding EUR 450 million within the EU.
  • Companies benefiting significantly from franchise royalties exceeding EUR 22.5 million.

Meanwhile, the EU Deforestation Regulation is size-agnostic, which applies regardless of the size criteria. In terms of this regulation, size only affects the implementation timeline. It targets commodities linked to deforestation risks, such as cattle, cocoa, and palm oil, significantly affecting sectors like agriculture, food production, and cosmetics. Briefly analyzing the in-scope entities:

  • Operators or traders placing listed commodities or their derivatives on the EU market, regardless of the business size.
  • Traders and operators involved in importing and exporting such commodities within the EU.

CBAM aims to prevent carbon leakage by ensuring that importers pay a carbon price on goods imported into the EU that are not already subject to equivalent carbon costs in their production country. This primarily affects industries such as manufacturing and energy, which deal with carbon-intensive products. In-scope entities include:

  • Importers of specified goods with a high carbon footprint, including cement, electricity, steel, aluminum, fertilizers, hydrogen products
  • Indirect representatives managing customs declarations for such goods.

Conflict Minerals Regulation focuses on the raw materials sector, particularly affecting businesses that source these minerals -commonly used in electronics and automotive industries- from conflict-affected and high-risk areas. It aims to ensure that European imports do not fund conflicts or human rights abuses. EU importers of minerals or metals containing or consisting of tin, tantalum, tungsten, and gold above certain thresholds can be affected by this Regulation.

The upcoming EU Forced Labour Regulation is the broadest regulation in terms of obliged entities, affecting virtually all sectors that import or export goods through the EU market. It aims to eliminate products made with forced labour from the EU supply chain, imposing a significant compliance burden across global trade operations. When it completes the legislative cycle, every manufacturer, producer, product supplier, importer, exporter, or any legal person placing or making available products on the EU market or exporting products from it can be affected by this Regulation.

Requirements and Due Diligence

While all these regulations share a common goal of ensuring sustainability and ethical practices, their approaches and focus areas vary significantly. The CSDDD and EU Deforestation Regulation reflect an expansive approach to environmental and human rights due diligence. In contrast, CBAM, Conflict Minerals Regulation, and EU Forced Labour Regulation focus more on issues such as carbon emissions, conflict funding through minerals, and forced labour in supply chains.

The depth and breadth of these regulations necessitate that companies adapt their operational and compliance strategies and engage in continuous monitoring and improvement of their supply chains. 

CSDDD focuses on the broad spectrum of corporate impact on human rights and the environment, demanding companies conduct thorough risk assessments and implement measures across their operations and value chains. This includes a structured plan to integrate sustainable practices aligned with the EU's environmental goals. CSDDD requires companies to notify stakeholders through accessible mechanisms about their due diligence practices, with additional reporting under the CSRD for applicable firms. This involves a comprehensive annual statement detailing the actions taken and their effectiveness.

Meanwhile, the EU Deforestation Regulation centers on commodity-based diligence, ensuring that products like wood, cattle, and other high-risk commodities do not contribute to global deforestation. It requires detailed traceability and legal compliance checks from harvest to market placement. It stipulates that companies prepare a due diligence statement to be submitted to relevant authorities.

Closer to the tax/levy area, CBAM targets carbon emissions associated with imported goods. Importers must verify the carbon intensity of goods such as steel and cement, providing detailed documentation about their carbon footprint. CBAM introduces specific reporting obligations, with a phased approach leading to mandatory detailed reporting by 2024. This includes disclosing the origins, production routes, and carbon costs associated with high-carbon goods.

Conflict Minerals Regulation mandates scrutiny of supply chains for minerals like tin, tungsten, tantalum, and gold, focusing on preventing conflict funding through mineral trade. Companies must establish a management system that identifies and mitigates these risks. It also requires an independent third-party audit and an annual public report on the supply chain due diligence processes and outcomes.

The EU Forced Labour Regulation addresses social concerns, specifically eradicating forced labour in product manufacturing. Companies must demonstrate due diligence to ensure that their products are free from forced labour, with a strong emphasis on transparency and proof of compliance when authorities investigate. Unlike others, it does not specify ongoing reporting requirements but demands cooperation with investigations into suspected violations, requiring evidence that products are free from forced labour influences.

Forward Thinking

The European Union regulations that enforce sustainability and ethical practices across global supply chains share common ground in advancing a more sustainable and ethically responsible global trade environment. These frameworks mandate shift from reactive compliance to proactive engagement in sustainable practices.

Adhering to these EU regulations mitigates risks and enhances corporate reputation. Consumers, investors, and partners view businesses that proactively engage in sustainable practices more favourably. This can translate into increased customer loyalty, potentially higher share prices, and an improved ability to attract and retain talent.

By implementing these regulations, companies are encouraged to revisit their operational strategies—optimizing resource use, minimizing waste, and reducing carbon footprints. For instance, the CBAM pushes companies to innovate in carbon-efficient technologies, which can lead to long-term savings and less dependency on carbon-intensive processes.

Regulations like CSDDD and the EU Deforestation Regulation require thorough due diligence across the supply chains, fostering closer collaborations between businesses and their suppliers. This can lead to stronger, more reliable supply chains and create opportunities for suppliers who can demonstrate compliance and reliability in sustainable practices.

Companies will need to revisit and potentially restructure their supply chains. This might involve sourcing alternative materials less harmful to the environment or more easily recycled. Transitioning to such alternatives could require significant upfront investment in new technologies and processes. The ban on certain single-use plastics will necessitate product redesigns for many businesses. This could be an opportunity to innovate with eco-friendly materials, but it also poses challenges in maintaining product functionality and customer satisfaction.

Finally, investors increasingly consider environmental, social, and governance (ESG) factors as investment criteria. Companies that excel in these areas due to stringent adherence to EU regulations will likely attract more investment from ESG-focused funds and investors, enhancing their financial sustainability and expanding their growth potential.

RSM is a thought leader in the field of International Trade and Sustainability consulting. We offer frequent insights through training and sharing of thought leadership based on a detailed knowledge of industry developments and practical applications in working with our customers. If you want to know more, please contact one of our consultants.