This article delves into the European Union’s Corporate Sustainability Due Diligence Directive (CS3D) proposal and probes the prospective role that Voluntary Sustainability Standards (VSS) can play, potentially offering existing structured frameworks for due diligence obligations, including commitment, assessment, mitigation, monitoring, communication and remediation infrastructures. The article, presented in a series of articles by UNFSS, highlights how certification processes can support the implementation of due diligence obligations to ensure sustainability in global value chains.
Currently, about 70 per cent of international trade is structured along global value chains (GVCs), where different steps of the production process are splintered across countries. While participation in GVCs can be a driver of economic growth, GVCs are also associated with adverse impacts on human rights and the environment.
The Rana Plaza disaster in Bangladesh exemplifies these adverse impacts, where the fashion industry’s demand for cheap labor led to exploitative working conditions, culminating in a tragic building collapse that claimed over 1,100 lives. Given the challenge to effectively monitor and regulate GVCs as production processes span across multiple countries, this example illustrates the critical importance of governing GVCs sustainably through due diligence measures to prevent human rights abuses and environmental harm.
To tackle these adverse impacts and foster sustainability in GVCs, several regulatory initiatives have emerged requiring companies to undertake human rights and environmental due diligence in their supply chains, such as the German Act on Corporate Due Diligence Obligations in Supply Chains (Lieferkettensorgfaltspflichtengesetz), the French Law of Vigilance (Loi de Vigilance) and the Norwegian Transparency Act. Other EU member states such as Belgium, the Netherlands, Luxembourg, and Sweden have also proposed new supply chain due diligence laws.
Notably, the European Union (EU) has introduced a proposal for a Corporate Sustainability Due Diligence Directive (CS3D), which is currently under “trialogue” among the EU institutions and is expected to establish consistency across EU Member States due diligence regulatory initiatives, as well as across other EU regulations such as the Non-Financial Reporting Directive (NFRD), the Corporate Sustainability Reporting Directive (CSRD), and the Sustainable Finance Disclosure Regulations (SFDR).
The CS3D proposal marks an ambitious yet challenging step towards holding corporations accountable for their social and environmental impacts along their value chains, in line with the UN’s Sustainable Development Goals (SDGs) and other global environmental and human rights commitments.
What is the CS3D?
In contrast with the EU Deforestation-free Products Regulation (EUDR) – which we explored in a previous article – which focuses on deforestation linked to specific commodities (soy, cocoa, coffee, oil palm, wood, cattle and rubber), the CS3D takes a broader approach and targets human rights and environmental due diligence in any corporate activity, regardless of the sector.
Due diligence process (OECD 2020)
Second, the CS3D introduces duties for directors of EU companies, requiring them to oversee due diligence processes, integrate them into corporate strategy, and account for the consequences of their decisions.
The current proposal is expected to apply to companies in the EU with over 500 employees and global net turnover over EUR150 million; to companies in the EU with over 250 employees and global net turnover over EUR40 million, provided that 50 percent of turnover was generated in high impact sectors (textiles, agriculture, forestry, and extraction of minerals); and to non-EU companies doing business in the EU with a turnover generated in the EU of the aforementioned thresholds. Based on these thresholds, it is expected that the Directive could directly impact approximately 13,000 EU companies and 4,000 non-EU companies. While micro companies and SMEs are not concerned by the proposed directive, the CS3D nonetheless includes measures to indirectly support SMEs, since, as suppliers of targeted companies, they will likely be affected by the directive.
However, the implementation of the CS3D is expected to pose significant challenges in holding transnational corporations accountable for their environmental and social impacts across complex, often fragmented supply networks. During the EU trade policy review in the World Trade Organization in June 2023, developing countries have voiced their concerns about the application of due diligence in several EU legislative proposals, including the CS3D. In addition to the unilateral approach of these legislations, they deplore the risk that the CS3D might result in companies diverting production away from certain suppliers and countries in the Global South where human rights and sustainability improvements are most needed. More particularly, the CS3D poses challenges for smallholders and small and medium-size enterprises (SMEs), who typically lack resources and may face increased costs to comply with the regulation, especially as large companies sourcing from these smaller actors may pass the burden of compliance onto them, or simply shift sourcing to safer areas. This generates risks of excluding these already vulnerable actors from global value chains.
VSS as supporting tools for CS3D implementation
Amidst these challenges, Voluntary Sustainability Standards (VSS) have emerged as possible tools to support companies in the implementation of their due diligence obligations under the CS3D. VSS are private standards that require producers to adopt practices that align with specific economic, social and environmental sustainability metrics.
VSS present potentially significant synergies with the CS3D as their existing infrastructures align with the due diligence process. First, VSS signal a commitment to responsible practices. Through their risk assessment requirements and corrective actions requests, VSS can also assist companies in identifying, assessing, preventing and/or mitigating the adverse human rights and environmental impacts of their activities. Besides, VSS can potentially serve as channels for remediation for affected stakeholders through their complaint mechanisms.
Several VSS, such as the Rainforest Alliance and Fairtrade International, have voiced their support for the CS3D proposal and perceive it as an opportunity for them to provide support in its implementation. While they welcome the CS3D as a positive step for sustainable GVCs, they are nonetheless calling for improvements in the current design of the regulation to mitigate its potential adverse effects on trade dynamics and inclusivity.
CS3D and VSS: challenges and way forward
While VSS have potential to play a pivotal role in the implementation of the due diligence obligations under the CS3D, there are also challenges that need to be carefully considered. VSS are diverse and have their own weaknesses pertaining to the effectiveness and transparency of their monitoring systems and complaint mechanisms. Hence, it is important to ensure that only the most credible VSS are recognized as legitimate to support companies in their due diligence obligations.
In addition, VSS as private voluntary tools lack formal legal authority towards companies to enforce due diligence elements. It is thus essential to maintain the primary responsibility for due diligence compliance with companies (i.e., no “safe harbor” for certified companies) and to avoid the transposition of directors’ liability to VSS organizations.
Importantly, VSS have also faced criticisms about excluding vulnerable and already marginalized economic actors, especially from developing countries, who cannot afford certification and compliance costs. VSS should hence ensure greater inclusivity to benefit those most in need, which could in turn help prevent the CS3D from further excluding actors of the Global South from GVCs dynamics.
The CS3D proposal is an ambitious yet challenging effort to promote responsible business practices along GVCs. The directive may benefit from leveraging the existing infrastructures and expertise of VSS in ensuring sustainable practices. However, both the CS3D and VSS pose challenges for developing countries. To maximize the positive impact of these initiatives, it is crucial for the EU and other stakeholders to provide support, resources, and guidance to help developing countries navigate the complex landscape of corporate sustainability. By doing so, we can work towards a more sustainable and equitable global economy.
Following the discourse, the upcoming UNFSS Academic Advisory Council Meeting, 12th October 2023, at the European University Institute in Florence, will assess the interplay of VSS and Due Diligence under the realm of global sustainability governance and consequent impacts on developing countries and sustainable trade at large.
Find out more about the UNFSS Academic Advisory Council here: https://unfss.org/academic-advisory-council/