A significant watering down of the final text of the proposed Corporate Sustainability Due Diligence Directive (CSDDD) means a majority of textile, apparel and footwear brands which deal with a large number of smaller manufacturers and suppliers, will not be directly included in the directive’s scope, according to a new report from Cascale and Worldly.
Cascale and Worldly’s policy deep dive titled “What to Expect from the EU’s Corporate Sustainability Due Diligence Directive” details the changes to the text that were adopted formally by the Council of the EU on 24 May ahead of the European Parliament elections and the Official Journal of the EU publication on 13 June.
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The CSDDD establishes obligations for large companies to undertake risk-based due diligence to identify, prevent, and mitigate adverse human rights and environmental impacts with their activities and broader business operations. This will be particularly relevant for large textile, apparel, footwear, and wider consumer goods companies that rely on intricate supply chains extending across regions. The directive would catalyse action from businesses across all sectors to address human rights and environmental challenges and serve as an international benchmark for responsible business conduct.
But Cascale and Worldly point out that a diluted final version also sees the removal of the “high-risk sector” approach. While the initial scope included EU companies with more than 250 employees and at least half of their above-€40m ($43.7m) worldwide turnover coming from a high-risk sector, including the manufacture and wholesale of textiles, the CSDDD no longer targets the textile industry alone and so the EU Commission will need to issue sector-specific guidelines for companies to manage their sectoral risk.
What are the implications of the CSDDD?
EU Member States will have two years to implement the regulations and administrative procedures to comply with the CSDDD.
Companies depending on their sizes and turnover will have a time window of three to five years to comply with the CSDDD.
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By GlobalDataThe report says companies directly included in the scope of CSDDD, including those in the textile, apparel, footwear, and wider consumer goods sectors will have to fulfil six main due diligence measures:
- Integrate due diligence into risk management
- Identify and assess actual or potential adverse impacts
- Prevent and mitigate potential adverse impacts
- Establish a notification mechanism and complaints procedures
- Monitor the effectiveness of the measures
- Publicly communicate on due diligence.
Failure to comply could result in naming and shaming; fines of up to 5% of the business’s annual worldwide turnover; and civil liability for damages caused by breaching their due diligence obligations and full compensations for those affected.
Key challenges for apparel, textile and footwear
CSDDD requires fashion companies to take due diligence measures of their direct operations, subsidiaries but also their indirect business partners through the chain of activities.
“The supply chains of the textile and apparel sectors are often complex, wide-reaching, and fragmented across geographies,” reads the report.
“The need to engage with multiple stakeholders along the chain of activities will require time and financial investments. The need to obtain contractual assurances from direct business partners that they will ensure compliance with responsible business conduct would also impose additional administrative costs.”
Commenting on the latest updates to the CSDDD, Eric Linxwiler, SVP of TradeBeyond, a global sourcing software firm, says the regulations have made it “abundantly clear that a superficial understanding of an enterprise’s supply chain is no longer sufficient.”
“Outdated, manual supply chain management processes are no longer enough to manage expanding considerations including chain of custody and Scope 3 carbon emissions. To make informed and sustainable decisions, brands and retailers require a comprehensive, 360-degree view of their supply chain, but that’s impossible given the siloed nature of traditional supply chain systems.”
He adds fashion brands and retailers must invest in “robust digital solutions geared toward efficiency and sustainability.”
“Digitalisation introduces the visibility that businesses need to constantly monitor, analyse, and improve the sustainability performance of their supply chains down to the nth tier, including water and energy consumption and Scope 3 carbon emissions. This visibility, in conjunction with cloud-based collaboration tools, allows retail businesses to better align with their suppliers on sustainability goals, something that’s proven to be a challenge for the industry. Recent studies have repeatedly found that in matters of sustainability, many global suppliers lag behind the soaring expectations of brands, consumers, and regulators.
“A key factor for companies’ success in ESG initiatives is the ability to synchronise with these suppliers. Every stakeholder, from the raw material provider to the final logistics partner, must have a clear understanding of the company’s expectations.
“Through digitalisation with a multi-enterprise platform, brands and retailers can enforce their sustainability standards and monitor suppliers’ progress while fostering the real-time collaboration and communication necessary to work toward these goals together. This collective alignment also enables accurate, transparent reporting on corrective action plans and the sustainability performance of suppliers.”
Are global supply chains set to become a thing of the past?
The report’s authors further note that a potential consequence of the CSDDD is that brands and retailers might disengage from “higher-risk partners.”
“Four out of the five top textile exporting countries in 2022 — China, Bangladesh, Vietnam, and India — are located outside of the EU. Businesses in these jurisdictions, in general, are regulated by less vigorous environmental and labour protection rules. As a result, EU companies may choose to replace suppliers that are vulnerable to due diligence violations and move some upstream business activities closer to home. Initial studies of existing due diligence laws indicate a likelihood of this trend.”
Cascale and Worldly call upon businesses to implement early planning of corporate due diligence programmes to prepare for the changes with the first phase of CSDDD implementation expected to begin as early as 2027.
These preparatory actions may include developing human resources plans, mapping the company’s chain of activities, reviewing existing supply chain contracts, and collating data on the company’s environmental and social performance for monitoring purposes. They also call for the implementation of supply chain mapping with data tools to track sustainability performance.
