Published: December 2024
The EU and other regions are turning in a new era of mandatory sustainability due diligence. With laws like the CSDDD, companies are now required to conduct due diligence on their supply and value chains for adverse impacts on human rights and the environment. Different laws have different requirements on what that means. Most laws carry a financial penalty if companies fail to live up to the requirements. Companies can also face reputational damage and that in turn may have financial consequences if its supply chain is tainted with human rights or environmental problems.
But what does this mean in practice? Do you need to conduct due diligence on your entire chain? What’s the difference between supply chains, value chains, and the EU’s new “chain of activities” concept?
In this blog, we’ll break down these terms, explain how far you need to conduct due diligence to comply with CSDDD, and exemplify how prioritizing risks can make compliance manageable.
What is the EU’s “chain of activities”?
The chain of activities includes all upstream individuals and companies and part of the downstream individuals and companies (those providing distribution, transport, and storage) involved in producing and delivering a product or service.
What do supply chains, value chains, and ‘chains of activities’ mean?
What is a supply chain?
Supply chains refer to the network of individuals and companies providing the materials, components, tools, and services needed to produce and deliver goods to the end-user. They are divided into two parts: upstream (e.g., raw materials like lithium-ion batteries or textiles for EV(electric vehicles) production) and downstream (e.g., logistics and storage delivering finished EVs to showrooms).
For financial actors, the downstream supply chain includes clients, such as private individuals and companies, that the bank invests in or finances.
What is a value chain?
A value chain is broader than a supply chain as it includes all activities and partners that contribute to adding value to a product or service. In addition to suppliers involved in production, it encompasses business partners that provide research, development, marketing, and design services.
Taking the EV example, the value chain would include R&D teams working on advanced battery technology, tire innovation, or marketing agencies promoting the vehicles at trade fairs. Like the supply chain, the value chain has both upstream and downstream elements.
What is the EU’s concept of ‘chain of activities’?
Chains of activities is a concept introduced by the EU to define the scope of due diligence under the Corporate Sustainability Due Diligence Directive (CSDDD). This was developed as a compromise between proposals for covering the full supply chain (both upstream and downstream) and those advocating for a narrower scope.
Under the CSDDD, companies must conduct due diligence on their upstream and downstream business partners to identify, prevent, and mitigate adverse impacts on:
- All upstream suppliers involved in production and related activities.
- Part of the downstream business partners, specifically those involved in the distribution, transportation, and storage of products, provided these activities are carried out for or on behalf of the company.
In addition, companies are required to identify adverse impacts within their own operations and those of their subsidiaries. For example, an EV manufacturer would need to screen logistics partners responsible for transporting and storing vehicles en route to showrooms.
This nuanced approach helps businesses focus their due diligence efforts on areas with the greatest potential impact while balancing feasibility and compliance requirements.
How far do you need to conduct due diligence for CSDDD compliance?
The CSDDD does not force strict limits on due diligence tiers but instead adopts a risk-based approach. Companies must focus on the most severe or likely risks and actual adverse impact first, such as child labor in high-risk sectors or environmental degradation in vulnerable regions.
The directive applies to approximately 6,000 EU companies and 900 non-EU companies directly, with tens of thousands more impacted indirectly. It requires companies to conduct due diligence on all upstream suppliers and part of downstream suppliers, particularly those involved in logistics.
Due diligence under CSDDD is a continuous process, allowing companies to expand their scope over time. While perfection is not expected at the outset, starting with high-priority risks makes sure businesses remain compliant while building sustainable supply chains.
How national due diligence laws compare?
While the CSDDD does not limit mandatory human rights and environmental due diligence (HREDD) to specific supply chain tiers, other national laws take a narrower approach. For instance, Germany’s LkSG requires in-scope companies to conduct due diligence for all direct suppliers. Indirect suppliers (Tier-2 and beyond acc to LkSG defintion) are only subject to screening if there are indications of potential violations, such as human rights abuses or environmental harm, in which case immediate action is required.
In contrast, Norway’s Transparency Act mandates due diligence across the entire value chain, following the OECD guidelines. This law requires companies to identify and address adverse impacts caused, contributed to, or directly linked to their operations, products, or services.
As EU Member States begin transferring the CSDDD into national legislation, some may choose to extend its scope to align more closely with the OECD definition, potentially requiring broader screening obligations.
How due diligence helps businesses?
Due diligence is more than a compliance tool — it’s a strategic advantage! It identifies risks, strengthens supplier relationships, and promotes sustainable practices. Beyond mitigating fines or reputational harm, due diligence builds trust with stakeholders and unlocks opportunities for innovation and positive change.
Starting your due diligence journey now makes sure you’ll be well-prepared for upcoming regulations and able to embed sustainability at the heart of your business strategy and operations. Why wait for potential fines or reputational risks when you can begin building a more responsible, resilient future today? Mastering due diligence will enable you to ace your responsible business conduct.
Want to see how you can simplify due diligence with Worldfavor? Book a free demo today!
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