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October 24, 2023

Supply chain legislation on the rise globally

The EU’s CSDDD has created some tension with trading partners, and experts warn local labour laws may not necessarily be aligned with EU norms requiring extraterritorial compliance by multinationals conducting their business globally. (Photo: Farooq Naeem/AFP via Getty Images)
The EU’s CSDDD has created some tension with trading partners, and experts warn local labour laws may not necessarily be aligned with EU norms requiring extraterritorial compliance by multinationals conducting their business globally. (Photo: Farooq Naeem/AFP via Getty Images)

More than a dozen countries are implementing mandatory corporate due diligence obligations that are likely to impact companies’ business operations, decision-making and litigation risk

Sustainable supply chains have become a focus for policymakers worldwide in recent years, as more countries are proposing legislation to tackle human rights violations and environmental harm across business operations. 

While the EU was the first to propose a common approach for the whole bloc – through its Corporate Sustainability Due Diligence Directive in 2022 – others are now implementing national legislation with similar aims.

For instance, New Zealand is finalising its own modern slavery act, which will be broadly based on the UK’s, in effect since 2015. Elsewhere, Mexico has recently passed a ban that prohibits the entry of goods made wholly or partially with forced labour, to comply with the United States-Mexico-Canada trade agreement.

At their core, most due diligence regimes are principle-based and require companies to identify and prevent adverse impacts of their supply chain activities, says Guillaume Croisant, litigation, arbitration and investigations managing associate at law firm Linklaters’ Brussels office.

“To a large extent, companies may thus implement general compliance and risk management policies which are aligned with ‘hard’ and ‘soft’ law standards, even if the due diligence regimes’ scope and enforcement mechanisms vary,” he adds.

The lack of alignment between jurisdictions’ different regimes could, however, become an issue, experts say. Davine Roessingh, partner and head of Dutch law firm De Brauw’s ESG expertise group, notes that most due diligence proposals cover a wide range of adverse human rights and environmental impacts, without a specific focus. This, Roessingh says, carries the risk of companies chasing too many negative effects at once, while leaving them ill-equipped to deal with the most vital issues based on a company-specific risk-based approach.

Croisant agrees that a lack of international harmonisation between companies that are subject to hard law – that is, legal binding – obligations and those that aren’t could make it an uneven playing field.

Companies with global activities may also grapple with legislative fragmentation, he says.

Enforcement and litigation

Public and private enforcement mechanisms are currently being tested against existing laws. For instance, Germany’s supply chain due diligence act allows for fines of up to 2 per cent of a company’s average yearly revenues.

Meanwhile, France’s Corporate Duty of Vigilance law of 2017 has already generated several lawsuits regarding companies’ compliance. BNP Paribas, Danone and TotalEnergies have all been subject to separate liability claims by activist groups that allege breaches of the law, and experts say companies are likely to be vulnerable to further litigation associated with their supply chains. 

Croisant points out that the emergence of substantive due diligence regimes may increase the risk of litigation in instances where plaintiffs can file claims directly before the courts of multinationals’ parent companies, as is envisaged by the CSDDD or the French vigilance act. Alleged breaches of duty of care – as seen in the UK over recent years – may also feature more often in court, he adds.

Roessingh says a defendant alleged to have breached its due diligence obligations could also opt for further litigation, involving another party in the supply chain to indemnify his/her own losses. This would then raise questions around the “causality” of the business relationships, she says.

Furthermore, both Roessingh and Croisant argue it is likely that this type of litigation may require courts to take a more prominent stance on business decision-making.

“I do fear that courts may be requested to redo the decision-making of companies and their boards, and it may well be that a standard should be developed on the level of scrutiny courts may assert over these decisions and underlying considerations,” says Roessingh. 

Some argue that, for enforcement to be truly effective, a dedicated regulator is needed to supervise the compliance of due diligence requirements.

Krishnendu Mukherjee, a barrister at London’s Doughty Street Chambers who specialises in human rights-related issues in India, insists that due diligence without expert regulators will not be highly effective on the ground. He says a “one-stop shop” is needed, rather than possible breaches or complaints being passed on from one regulator to another that may not have adequate sector knowledge.

Extraterritorial reach

In its current format, the CSDDD would apply to EU and non-EU companies active in the EU market as well as include EU companies’ activities in outside jurisdictions.

The EU’s decision to extend its sustainability agenda outside its own jurisdictional frameworks has created some diplomatic tension with other countries. Notably, this extension of regulatory power has been questioned with the implementation of regulations such as the carbon border adjustment mechanism, the bloc’s anti-deforestation law and more recently also trade agreements.

Roessingh says the extraterritorial component of CSDDD may have to rely heavily on the willingness of foreign courts to uphold contractual information rights through contractual cascading with suppliers. She warns that local environmental and labour laws and practices may not necessarily be aligned with EU norms, requiring extraterritorial compliance by multinationals conducting their business globally.

Croisant expects this tension with EU trading partners to become “especially heated” since CSDDD is likely to impose on non-EU companies not only due diligence obligations, but also potentially the drawing up of transition plans in line with the objectives of the Paris agreement.

While the CSDDD’s impact on international trade are not yet clear – given that the final version of the directive is still under discussion – it is possible that companies may decide to withdraw their operations from certain countries based on their own risk assessment, says Mukherjee at Doughty Street Chambers.

He notes that where possible, companies will be looking at shortening their supply chains – not only in light of increased scrutiny on human rights due diligence but also to reach their stated climate ambitions.

A service from the Financial Times