The EU Corporate Sustainability Due Diligence Directive (CSDDD), passed on July 25, 2024, will significantly impact Indian businesses that are suppliers to companies within the European Union (EU). This new regulation requires companies in the EU to ensure that their entire global supply chain complies with strict human rights and environmental standards.

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Relevance for Indian Companies
 

The European Union (EU) is India's largest trading partner, with EUR 124 billion (INR 11 lakh crores) worth of trade in goods in 2023 i.e. 12.2% of total Indian trade.
 

All Indian companies who supply to the EU companies, along with their Indian clients and subsidiaries, risk losing their business and incurring reputation damages as a result of the more stringent sustainability requirements of their EU-based clients.
 

Key Aspects of the New Directive

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1. Which companies are affected?
 

- EU companies with more than 1,000 employees and a global turnover exceeding EUR 450 million are subject to this Directive

- Non-EU companies which meet these criteria within their EU operations.
- Franchisors and licensors that meet certain conditions and thresholds.
 

International suppliers, in this case Indian companies, that are suppliers to any of the EU companies that are covered under this Directive, are also in turn affected by it. For EU companies, their Indian vendors and suppliers are the link to the lower tiers of their chain of activities. Indian companies do not directly fall under the jurisdiction of this Directive, and do not hold any civil liability. However, their business and growth, along with their market reputation and profitability, can be directly and drastically affected should they be found to negatively impact the climate or human rights within their own supply chain.
 

2. What are the consequences of non-compliance for EU Companies?

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i EU authorities can impose injunctions, sanctions, fines and also consider these violations while awarding public and concession contracts to the concerned company

ii. The non-compliant company will have to provide full compensation to the victim for the damage suffered. Injured parties may authorise a trade union, a non-governmental organisation based in an EU Member State to bring actions on their behalf.

This means that if their Indian suppliers fall short in the due diligence of their entire supply chain, the EU-based clients would incur large financial costs.
 

3. Which business activities are covered in the chain of activities of the EU company?
 

Upstream business activities related to the production of goods or the provision of services by the company, including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of products and the development of the product or the service.
 

Downstream business activities related to the distribution, transport and storage of the product, where the business partner carries out those activities for the company or on behalf of the company.
 

4. What will be the likely demands made of Indian suppliers?
 

The EU companies that are covered under this new law will prioritise more transparency and insight into the supply chain of their Indian suppliers. They are expected to demand-
 

1. Integration of due diligence into the corporate policies and risk management systems
    

2. Identification of adverse human rights and climate-related impacts in the company’s operations, and thise of its subsidiaries and business partners
    

3. Ending or at least minimising the extent of the identified negative impacts, and preventing future potential impacts in order of prioritisation
    

4. Providing remedies and compensation if they are found to have contributed to the adverse impacts in their chain of activities, either through action or emission
    

5. Establishing and maintaining a complaints and notification procedure
    

6. Monitoring the effectiveness of due diligence measures
    

7. Openly and regularly sharing information with them on due diligence, risk management and risk mitigation activities.
    

Could you lose business?
 

The Directive requires EU companies to prioritise engagement and investment. Suspension or termination of business agreements are measures of ‘last resort’. But, when all other efforts have failed, and the severity of impacts outweigh the foreseeable negative outcomes of disengagement, EU companies will choose this path.
 

So, It is in the interest of Indian businesses to work alongside their EU clients to fully trace and secure their supply chain, ensuring as far as possible, that there is no adverse impact on human rights or the environment.
 

Timeline for the Application of the New Directive
 

EU Member States have until 26 July 2026 to transpose the Directive into national law.
 

One year later (26 July 2027), the rules will start to gradually apply to companies in phases of 3 to 5 years -
 

3 years (26th July 2027) for EU companies with more than 5000 employees and €1500 million worldwide turnover, and non-EU companies with more meeting this criteria in their EU operations.

4 years (26 July 2028) for EU companies with more than 3000 employees and €900 million worldwide turnover, and non-EU companies with more meeting this criteria in their EU operations.

5 years (26 July 2029) for all other companies in scope of the law.
 

EU companies have already begun updating their policies and practices, to protect themselves from the accountability measures of the new law. As part of this, they will need their suppliers across the world to also come up to speed with their new requirements well in time before the penalties are enforceable.
 

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