The EU Supply Chain Directive also known as Corporate Sustainability Due Diligence Directive (CSDDD), effective from January 1, 2025, presents a significant shift in the regulatory landscape for businesses operating within the European Union. This directive mandates that companies take responsibility for human rights and environmental impacts throughout their supply chains, extending beyond EU borders to encompass third-country partners, including those in India.

Scope and Applicability of the EU Supply Chain Directive

The EU Supply Chain Directive applies to a broad range of companies, both within the EU and beyond. Determining whether your company falls under the directive’s scope is crucial for compliance. The following criteria are used:

1. EU Companies:
   • Large Companies: Companies with over 500 employees and a net worldwide turnover exceeding EUR 150 million.
   • Parent Companies: Parent companies of groups exceeding these thresholds.
2. Third-Country Companies: Companies with significant EU operations, generating a net turnover of at least EUR 150 million in the EU.

Due Diligence Requirements for EU Companies

The due diligence process outlined in the EU Supply Chain Directive involves a comprehensive approach to identifying, preventing, and mitigating adverse human rights and environmental impacts across a company’s value chain.  

Integrating Due Diligence into Company Policies:

Companies must integrate due diligence into their policies, risk management systems, and overall corporate governance framework. This includes:  

• Developing a due diligence policy that outlines the company’s approach to identifying and addressing risks.
• Integrating due diligence into relevant corporate functions, such as procurement, employment, and purchasing decisions.
• Ensuring that the due diligence policy is risk-based and prioritizes the most severe and likely impacts.

Identifying and Assessing Adverse Impacts:

Companies must identify and assess potential adverse human rights and environmental impacts in their own operations, those of their subsidiaries, and their business partners. This includes:  

• Mapping their value chain to identify areas where adverse impacts are most likely to occur.
• Conducting in-depth assessments of potential human rights and environmental risks.
• Considering relevant risk factors, such as the company’s economic sector, geographic location of operations, and level of influence over business partners.

Preventing and Mitigating Potential Adverse Impacts:

Companies must take appropriate measures to prevent or mitigate potential adverse impacts. This includes:  

• Seeking contractual assurances from business partners.
• Making necessary financial or non-financial investments.
• Adapting business plans, strategies, and operations.
• Collaborating with other companies and stakeholders.

Bringing Actual Adverse Impacts to an End:

Companies must take appropriate measures to bring actual adverse impacts to an end or minimize their effects. This includes:  

• Developing and implementing corrective action plans.
• Seeking contractual assurances from business partners.
• Making necessary investments and adjustments to operations.
• Collaborating with other companies and stakeholders.

Providing Remediation:

Companies must provide remediation for actual adverse impacts. This includes:

• Financial or non-financial compensation to affected individuals or communities.
• Reimbursement of costs incurred by public authorities for remedial measures.

Monitoring and Communicating:

Companies must monitor the effectiveness of their due diligence measures and communicate their due diligence efforts transparently. This includes:

• Carrying out periodic assessments of their due diligence processes.
• Publishing an annual statement on their due diligence activities.

Additional Considerations:

• The directive emphasizes the importance of meaningful engagement with stakeholders throughout the due diligence process.
• Companies are encouraged to collaborate with industry associations, NGOs, and other stakeholders to share best practices and leverage expertise.
• The European Commission and national supervisory authorities will provide guidance and support to companies in complying with the directive.

Specific Considerations for Indian Industries

When dealing with Indian partners, EU companies should consider the following:

• Mapping the Supply Chain: Identify all tiers of suppliers and partners within the Indian context.
• Risk Assessment: Assess risks specific to the Indian context, including labor exploitation, child labor, forced labor, discrimination, pollution, and deforestation.
• Collaboration: Engage with Indian partners to understand their due diligence processes and support their compliance with the directive.
• Contractual Agreements: Incorporate specific clauses in agreements with Indian partners to ensure compliance with the directive’s requirements.

Relevant Indian Legislation

While India does not have a direct equivalent to the EU Supply Chain Directive, several Indian laws address human rights and environmental protection. These include:

• The Constitution of India: Guarantees fundamental rights, including the right to life, equality, and freedom from exploitation.
• The Bonded Labour System (Abolition) Act, 1976: Prohibits bonded labor and forced labor.
• The Child Labour (Prohibition and Regulation) Act, 1986: Prohibits the employment of children in hazardous occupations.
• The Factories Act, 1948: Regulates working conditions in factories.
• The Environmental Protection Act, 1986: Provides a framework for environmental protection and pollution control.

Drafting Agreements to Mitigate Risk

Agreements with Indian partners should include clauses that:

• Mandate compliance with the EU Supply Chain Directive and relevant Indian legislation.
• Require the implementation of due diligence processes.
• Establish grievance mechanisms for workers and affected communities.
• Provide for independent third-party audits to verify compliance.
• Outline consequences for non-compliance, including potential termination of the business relationship.

Conclusion

The EU Supply Chain Directive presents both challenges and opportunities for EU companies dealing with Indian industries. By understanding the directive’s requirements, conducting thorough due diligence, and collaborating effectively with Indian partners, EU companies can mitigate risks, build sustainable supply chains, and contribute to responsible business practices in India.