Supply Chain Due Diligence Directive & its application in the UK

On 24 May 2024 the Corporate Sustainability Due Diligence Directive (CSDDD) has finally also been adopted by the European Council which is the last step in the EU decision making process. Once published in the Official Journal of the European Union, member states have two years to transform the directive into national law. This EU directive seeks to encourage a framework that enhances the transparency and accountability of (large) companies, ensuring their strategy and operations align with environmental and human rights standards throughout their supply chains and business activities. Whilst it is an EU directive, it also applies to third-country (e.g. the UK) companies,

• with significant activities in the EU, i.e., a turnover of EUR 450 million in the EU,
• if they are the ultimate parent company of a group that reaches EUR 450 million on a consolidated basis, or
• having entered into franchising or licensing agreements in the Union with a return of more than EUR 22.5 million in royalties and a net turnover in the EU of more than EUR 80 million.

When covered by the directive, companies will in particular have to integrate due diligence into their policies and risk management systems and have in place a due diligence policy and a code of conduct. Even though SMEs are not directly in scope, they might be affected in their capacity as contractors or subcontractors to any companies captured by the above criteria. The originally proposed Article 25 of the directive which included specific requirements for the board of directors to take into account the consequences of their decisions for sustainability matters, including human rights, climate change and environmental consequences has been removed However, under English law the implementation of the requirements of the directive overall will fall under the responsibilities of the board of directors as part of their overarching duty to manage the company and to promote the success of the company. In line with that, the UK also provides for certain disclosures e.g.in the strategic reports according to 414C,414A and 414B of the Companies Act 2003. Thus, over the coming two years, companies will have to identify which of the requirements of the directive and also which reporting requirements in the UK they must comply with and in whose responsibility these requirements are vested within the organisation to enable the board to properly oversee the requirements and report accordingly where required. Companies should start preparing now to ensure that they are able to comply with the requirements or to respond to questions from their supply chains in a timely manner. For expert corporate governance law advice, please contact us to speak to a member of our Corporate Governance Team.