The (Un)certain Future of Sustainable Supply Chains Regulation │Poland

The EU’s Corporate Sustainability Due Diligence Directive (CS3D) could transform the way business relationships are shaped across the market. Meanwhile, the controversy surrounding the enactment of the final version of the proposal continues. Following the proposal’s failure to receive a sufficient majority in a vote held by EU member states on 28 February 2024, an agreement was reached on 15 March 2024.

Now the process is edging closer to its ultimate goal – enactment of the proposal at the European Parliament plenary session in April. However, if CS3D is not finally passed in this Parliamentary term, does this explicitly mean that companies will not be required to implement ESG aspects part of their value chain management?

The EC has ensured that supply chain management commitments are addressed beyond the CS3D project itself. Companies covered by the EU’s Corporate Sustainability Reporting Directive (CSRD) are required to report data related to sustainable supply chain management. There are two perspectives to consider in this respect, as follows.

Eventually, the type and extent of data to be reported depends on the outcome of double materiality assessment. However, it is expected that numerous companies will be required to report data on value chain management.

Although the CSRD makes disclosure mandatory, it does not introduce sanctions for inaction or inadequate value chain management measures. Practice will show whether reputational risks and potential stakeholders’ engagement will be a sufficient motivator for companies to take effective steps in this respect.

The trend towards providing a legal framework for ESG verification of suppliers goes beyond EU law itself. In the EU alone, regulations for sustainable supply chains have been introduced – specifically, in the Netherlands (the Child Labour Due Diligence Law), Germany (the Supply Chain Act), and France (the Corporate Duty of Vigilance Law). Furthermore, the field of corporate sustainability due diligence has been covered by international standards – namely, the 2011 United Nations Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises (the “OECD Guidelines”), the OECD Guidance on Responsible Business Conduct, and the International Labour Organization’s Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy.

In practice, this implies a requirement for companies to sign an ESG-related code of conduct when co-operating with entities covered by the aforementioned regulations. Market practice already shows that the indicated standards are being applied by the largest companies with greater ESG ambitions. With the development of supply chain management regulations, a growing number of companies are expected to implement the use of sustainability codes of conduct.  

In general, to qualify an investment as sustainable, a sustainable environmental and/or social objective is necessary. However, there is no getting away from meeting certain governance requirements as well. In light of the EU’s Sustainable Finance Disclosure Regulation and its Taxonomy Regulation, qualification of an investment as sustainable requires that the investee company meet requirements in the field of sustainable governance. Depending on the company and the sector it operates in, responsible management of supplier relations could be considered to fall within the scope of the indicated requirements.

Under the Taxonomy Regulation, compliance with sustainable governance requirements has been defined as “Minimum Safeguards”. Compliance with Minimum Safeguards means that the investee company conducts its business in accordance with selected international standards, including the OECD Guidelines. Given that the OECD Guidelines cover responsible supply chain management issues, it could be argued that sustainable investment – within the meaning of the Taxonomy Regulation – includes conducting business in a way that incorporates sustainable supply chain management. Therefore, companies seeking financing for investments labelled as sustainable should implement sustainability principles into supplier relationship management.

CS3D was seen as a crucial legislation in the ESG “governance” area for years, following its announcement by the EU legislator. The project covers one of the key governance issues – namely, co-operation with suppliers. It is therefore highly likely that, even if CS3D is not enacted in the current Parliamentary term, the topic will be revisited under another EU regulation and possibly entail a different approach towards requirements and/or a new approach to the scope of entities.

If CS3D is finally approved or a new proposal is presented, it will eventually require implementation within national legal systems. For EU member states that have already implemented supply chain management regulations, the adaptation of existing requirements to EU law will become necessary.

From the perspective of companies, EU “chain of activities” obligations could come into effect in a few years. However, given the importance and number of the obligations in question, adequate preparation for CS3D implementation requires starting work well in advance.