EU Anchors Human Rights and Environment in Company Supply Chains

The European Parliament formally adopted the Corporate Sustainability Due Diligence Directive, or CSDDD, on April 24, marking a significant advance for the sustainability agenda in the EU.

This milestone builds on prior approval from the European Council. Despite initial opposition from Germany, France, and Italy, the member states managed to reach a compromise—a compromise that required scaling back the scope and timeline.

The directive sets out requirements to ensure that the goods offered in the EU aren’t produced in violation of basic protection criteria for people and the environment. For European companies that benefit from the advantages of global supply chains, this implies an obligation to use them without compromising a basic level of protection for all those involved.

The directive affects large EU and non-EU companies in relation to the potential adverse effects of their operations, as well as those of their direct and indirect commercial partners (only for upstream activities). There is a phase-in calendar for the provisions from three to five years depending on companies’ size and turnover

Adjustments this year have resulted in approximately 5,500 companies falling within the directive’s scope, representing a reduction of nearly 70% compared to the previous agreement reached in December. In the negotiations, thresholds were raised to 1,000 employees and a turnover of 450 million euros ($480 million), and the threshold for non-EU companies operating within the EU was raised to a net turnover of more than 450 million euros in the Union.

Tax Implications

The CSDDD could overhaul an organization’s supply chain, changing its underlying value drivers and economics, by shifting how and where it operates. For example, greening the supply chain may shorten it geographically. New value may be driven from green intellectual property and technology as well as renewable energy generation.

Transformations of this kind upend transfer pricing and intellectual property models as they take organizations into new markets and value chains while exiting or restructuring others. And as the physical and transactional footprint of the goods changes, so will an organization’s indirect tax and customs profile.

Organizations should make sure they carry out a tax value chain analysis on their refined business model, which should be the first step toward managing the intellectual property, transfer pricing, and indirect tax consequences.

Change of this kind is an opportunity to reassess an organization’s tax position. Choices around the source goods or materials and their transport method will affect the customs and excise duty position. Such decisions may also allow companies to unlock value-added tax trapped in the supply chain.

Similarly, as sustainable procurement takes a more prominent role in organizations, tax leaders will need to value its contribution for transfer pricing purposes.

Corporate Responsibilities

Activities in scope. The scope of due diligence obligations has caused considerable debate, with a key point of contention around the extent of activities it covers. Amendments have targeted direct business partners rather than indirect ones. References to financial activities and sector-specific details have been removed from the downstream part of the covered activities.

Due diligence and response actions. The directive standardizes a two-stage system for preventing and ending violations of human rights and environmental protection standards. First, companies are required to take appropriate measures to prevent the production or promotion of products that violate such standards. This includes comprehensive due diligence along the supply chain and the obligation to enforce minimum standards with suppliers.

Second, companies are obliged to actively intervene in the event of grievances identified in their supply chains, whether through warnings, audits, or the termination of business relationships.

The proposal also includes provisions to adopt and carry out a transition plan for climate change mitigation (excluding those companies already fulfilling this under the Corporate Sustainability and Reporting Directive).

Civil liability. Violations of due diligence and response obligations can lead to civil liability in addition to public law sanctions. However, the provisions on civil liability have been amended to give more flexibility to member states, and there is no express inclusion of director’s liability.

What’s Next

After having received approval from the European Parliament, the CSDDD awaits formal endorsement by the Council. After this, and following the publication of the final text in the Official Journal of the EU, the directive will take effect 20 days later.

At this point, EU member states will have a period of two years to transpose the directive into national law and adapt their legislation with the provisions outlined in the directive. The phasing in period will be implemented gradually, culminating in the full application of the rules for the largest companies falling within the scope by mid-2027.

The directive aims to strengthen corporate responsibility for sustainability—reinforcing the role that businesses can play in protecting the environment and human rights while not placing an excessive burden on the competitiveness of European companies. The concern for the potential burden for small and medium-sized enterprises and the related costs has been the main reason for the delay in reaching a consensus in the Council.

It may not be relevant that the directive won’t directly apply to as many companies as initially proposed. It will have a much greater effect, as it will trigger supply chain expectations that will shape contracts, investor questions, and a level playing field for companies on environmental and human rights due diligence—affecting EU and non-EU companies. This directive is a real game changer.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Pilar Galán Gavilá is partner with KPMG and global ESG legal lead.

Dharini Minawala is a senior manager, KPMG global ESG tax & legal.

Matilde Whittaker Mancha is a paralegal with KPMG.

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