What does the new EU supply chain law mean for food companies?

Change is on the horizon with the EU’s proposed directive on supply chain due-diligence. Here’s why food companies shouldn’t panic, but instead see this as an opportunity to get ahead of the game.

A draft law from the EU, formally known as the Corporate Sustainability Due Diligence Directive (CSDDD), proposes to significantly expand the reach of corporate due-diligence. Under the new law, due diligence would be extended to the protection of human rights, the environment, and the climate throughout a company’s supply chain. [1], [2] This follows a new German law on the same issue that came into force at the beginning of 2023 [3] - and the draft law by the EU plans to expand the scope of this due-diligence even further.?

With the new piece of German legislation already in force, and a new EU law on the horizon, it is becoming ever more important for companies to review the human rights implications, the climate impact, and environmental protection measures of their supply chains.?

However, the CSDDD has still not been officially voted in, a final decision is not expected until at least early 2024, and even then legislation allows for an implementation period. [4] This means that the draft law is not a cause for panic, but rather presents an opportunity for food companies to secure an advantage and get started early, by ensuring that they limit and mitigate the human rights and climate impacts in their supply chain.?

This article will explain:

• The CSDDD: what it proposes
• What these new rules will mean for food companies?
• How the CSDDD proposes to go further than the current German law
• Where the CSDDD falls short?
• The opportunity for food companies

The CSDDD: what it proposes?

The CSDDD plans to ensure that companies integrate due diligence into their company policy. Companies would have to:

• identify actual and potential harm to human rights, the environment, and the climate
• take action to mitigate this harm
• establish a complaints procedure
• monitor the effectiveness of their due-diligence policy
• publicly communicate their due-diligence [5]

In addition to these due-diligence measures, combating climate change would have to be integrated into company policy: companies would also be obliged to ensure that their business strategy is in line with the 1.5 degree Paris-Agreement target. [6]

These regulations would apply to the following companies:

• EU companies consisting of at least 500 employees, and with at least €150 million net turnover.
• EU companies with at least 250 employees and with a net annual turnover of at least €40 million in “high-impact sectors” (this includes the manufacture of food products, and the trading of agricultural materials and live animals).
• Companies based outside the EU, but making profit within the EU that exceed the €150 million threshold, or €40 million threshold in high-impact sectors. [7]

In short, the directive would oblige all large companies to act responsibly and sustainably. Businesses would become directly involved with and accountable for human-rights and environmental concerns.

However, it should be noted that these changes would not be required instantly, instead there would be a “phase-in-period” bridging the gap between when the directive enters into law and when it starts to apply: 3 years or more scaled according to the size of the company. [8]

What does this mean for food companies?

First of all, the manufacture of food products is considered a “high-impact sector” under the CSDDD. This means that the threshold above which these rules apply is lower for food companies than for other sectors: food companies making more than €40 million per year in profits and with more than 250 employees would have to comply. For companies over this threshold, this would likely mean added expenses, since the CSDDD specifies that businesses would bear the costs of establishing, transitioning to, reviewing and monitoring the due-diligence measures themselves. [9]

The crux of the CSDDD is the demand for a systematic review of supply chains for all companies that meet the criteria. [10] This would therefore include the impacts of farming, manufacturing, the production of packaging, and the working conditions of everyone involved. Possible areas of improvement for food companies include the use of pesticides in agricultural practices, loss of biodiversity, and low wages.?Integrating regenerative practices into the agricultural production element of a supply chain offers a possible solution to a number of these issues. Regenerative agriculture aims to increase soil health and thereby reduce the need for fertilisers and pesticides, minimise CO? emissions, and promote biodiversity. Learn more about regenerative agriculture here .?

How is the CSDDD different from the current German law?

Back in 2021, Germany passed a supply chain law (the Lieferkettensorgfalts-pflichtengesetz), which came into effect at the beginning of 2023. The law requires companies to protect human rights throughout their supply chains. Companies must analyse and mitigate actual or potential harm to human rights, as well as monitoring the effectiveness of their policies. Formal complaint procedures must be established, and these procedures must all be correctly documented. [11]

The EU’s CSDDD goes significantly further than the German law:

• Greater emphasis on environmental protection: The German supply chain law was predominantly limited to the upholding of human rights, and only indirectly included environmental protection. The CSDDD, on the other hand, directly lists environmental concerns such as pollution or loss of biodiversity as an essential part of a company’s due-diligence in its own right.
• Greater scope: The EU’s directive would apply to companies with as few as 500 or even 250 employees (as detailed above). By comparison, the threshold set by the German law is much higher: the supply chain regulations apply only to companies with at least 3000 employees from 2023, and to companies with at least 1000 employees from 2024. [12]
• Greater accountability: The German law is primarily enforced through fines, and individuals can make complaints at the Federal Office for Economic Affairs and Export Control (BAFA). The EU law, on the other hand, would oblige companies to fulfil their obligations by civil law [13] and so, crucially, what was once best practice would simply become a legal obligation for businesses.

Where do the CSDDD and German law fall short?

Despite going further than German law, the CSDDD has nonetheless been criticised for being watered down since the initial proposal, and for leaving loopholes that will limit its positive impact. [14], [15]

Most notably, the initial proposal from 2022 made companies responsible for their entire “value chain”, which would have been a significant step towards combating both upstream and downstream scope 3 emissions. However, the directive has since been altered, limiting the necessary due-diligence to just the process up until the services and products reach customers. The scope of the CSDDD is now much closer to the idea of a supply chain. [16], [17] For example, the negative impacts caused by a customer using or disposing of a product would no longer need to be considered as part of the company’s due-diligence.

A window of opportunity for food companies

The process of getting the CSDDD approved by the European Parliament is not expected to be plain-sailing. [18] This means that now is the perfect time for food companies to get ahead of the game, and look to improve the human rights as well as environmental and climate protection measures in their supply chains. This assures stability, and means that companies will be well-prepared for the legislation when it comes to fruition.?

Moreover, the shortcomings of the CSDDD mentioned above make it clear that there is still a lot of potential - and the need - for companies to exceed the legal requirements in order to make the European economy future-proof. The competitive advantage of ensuring a resilient value-chain is likely to remain for the foreseeable future.

Klim supports food companies that want to transition their supply chains to regenerative agriculture, and thus address multiple socio-environmental and climate risks. To learn how Klim can support your business‘s sustainability goals,? don't hesitate to get in touch .

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