Commission proposal for EU supply chain law – new challenges for compliance and reporting

Pressure from the markets to act sustainably

More and more EU companies are using value-chain due diligence as a tool to identify risks and strengthen their resilience to future economic and environmental risks. At the same time, they are bowing to increasing market pressure to act sustainably.

The proposal is intended to make an important contribution to achieving the EU’s climate targets, and is in line with previous EU legislation in this area – for example, the Taxonomy Regulation or the Corporate Sustainability Directive (CSRD).

New compliance obligations for affected companies

The directive aims to establish due diligence obligations with regard to negative impacts on human rights and the environment on the one hand, and liabilities in the event of violations of these regulations on the other.

The implementation of the Supply Chain Act entails a comprehensive expansion of existing due diligence obligations. The draft directive provides for an evaluation to be carried out at least once a year on the basis of previously identified risk areas. With respect to human rights, for example, these include child labour or systematic exploitation and forced labour.

Impact on corporate reporting and new obligations for management bodies

Art 11 of the draft EU Supply Chain Law provides that companies not subject to the reporting obligations under Art 19a and 29a of the Accounting Directive shall report on supply chain law matters by publishing on their website an annual statement for the previous calendar year by April 30 of each year.

Regarding the content of and criteria for the reporting, the Commission will adopt delegated acts specifying the information to be provided on the description of due diligence, potential and actual negative impacts, and countermeasures taken.

In addition to the companies themselves, however, the members of the company management will also be held accountable. They are to be obliged to take sustainability aspects into account in their decisions in addition to purely economic factors. This is intended to make binding human rights, climate, and environmental policy objectives.

Implementation

As already mentioned, the Commission presented the draft EU Supply Chain Law on 23 February 2022. Due to the numerous criticisms and the legislative structure of the EU, adoption of the directive is not expected before 2023 at the earliest.

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