New EU directives tighten the requirements for identifying and managing supplier risks related to sustainability. But what does it really mean to work with due diligence in the supply chain?
What is sustainability due diligence? The Swedish term for due diligence is tillbörlig aktsamhet. Whatever term you use, it means the same thing. It's about complying with EU sustainability directives - directives that require you to be able to identify and manage risks related to human rights, environmental impacts and business ethics in your supply chain.
Within the EU, this work is regulated by two directives: the Corporate Sustainability Due Diligence Directive (CSDDD ) and the Corporate Sustainability Reporting Directive (CSRD). Sustainability legislation mainly targets large companies, but small companies will also be affected by demands from their customers and partners.
Challenges and Risks in Due Diligence
Purchasing departments today face a major challenge in ensuring transparent and responsible behavior throughout the supply chain. This involves a growing number of legal and reporting requirements to comply with sustainability legislation in the form of new EU directives. At the same time, resources and expertise are often limited.
Anna Lindstedt is an ESG expert at Stratsys:
- When it comes to sustainability due diligence, many people talk about CSDDD, but there is also a lot of other legislation from the EU. Not least CSRD with reporting on workers in the value chain, climate data and much more. We also have the taxonomy that mentions Minimum Safeguards, minimum criteria for protective measures. For companies operating in Norway, you also need to take Åpenhetsloven in account.
Not only larger companies are affected by sustainability legislation such as CSDDD and CSRD, says Anna Lindstedt:
- Even companies that are not directly affected by the EU directives will feel it indirectly in the supply chain. And alongside this, we also have industry-specific legislation linked to sustainability, such as the REACH chemicals legislation. We also have CBAM, which puts climate tariffs on certain goods.
Anna Lindstedt, ESG Supply Chain Lead at Stratsys
Challenges in Due Diligence
So what are the main challenges you face when it comes to sustainability due diligence? They include, among others:
- Lack of transparency in the supply chain. The further down the chain, the more difficult it is to gain transparency.
- Managing high-risk suppliers. What risks are acceptable and how should they be managed?
- Lack of time and resources. Full due diligence requires both expertise and system support.
Working systematically and setting the right priorities is crucial to managing risks and achieving sustainability compliance. Thanks to a structured process, you can ensure that your company complies with EU directives.
Ensure Effective Due Diligence
Utilizing the company's limited resources in an efficient way is a key issue to succeed with your due diligence and comply with, for example, CSDDD, according to Anna:
- I usually illustrate a good process with a funnel, where you prioritize resources on high risk suppliers. You go through screening, risk analysis and self-assessment forms - and only if you identify something that indicates potential risk do you continue to investigate the supplier. At the bottom of the funnel are inspections, which take up the most resources.
Effective sustainability due diligence requires working in a structured way according to a well thought-out process. This process should consist of a number of steps.
1. Identify and Analyze Risks
The first step in successful sustainability due diligence is to identify potential negative impacts. This often involves:
- Risk analysis based on industry and country.
- External tools such as sanction lists and warning systems.
- Supplier self-assessment forms to collect relevant information.
2. Requirements and Contracts
Once you have identified the risks, you need clear guidelines for suppliers, including requirements. This often involves:
- Supplier Code of Conduct (SCoC) A supplier document describing the company's sustainability requirements.
- Contract terms and conditions. Specific requirements for improvement actions linked to the identified risks.
3. Monitoring and Actions
Do suppliers comply with the sustainability conditions you set? Answering this question requires regular monitoring. This can be done in different ways, but some common methods include
- Self-Assessment Questionnaires (SAQs) - a cost-effective way to collect information.
- Inspections and audits - for high-risk suppliers.
- Whistleblowing systems - a way to identify problems in the supply chain.
Actively addressing problems and helping suppliers to improve is a key part of due diligence. Only as a last resort should a supplier relationship be terminated.
4. Reporting and Transparency
Companies subject to the EU directives are not only required to carry out due diligence, but also to report on their efforts. The reporting includes:
- What risks were identified.
- What actions have been taken.
- how the process has been evaluated and improved.
Reporting is crucial to comply with legal requirements, but it also helps to strengthen the company's credibility with customers and investors.
The Future of Due Diligence
It is reasonable to imagine that the requirements for transparency in supply chains will increase as a result of the new legislation from the EU, not least linked to CSRD and CSDDD. As a result, companies need to be more proactive in their sustainability due diligence. Trends that we see include
- Increased mapping of subcontractors - the entire chain from raw material to finished product.
- More integrated IT systems - facilitating traceability and reporting.
- Fewer but stronger supplier relationships - to better control risks.
Well-functioning supply chain due diligence is essential to meet future demands for sustainability and transparency. It not only ensures compliance with EU directives such as CSRD and CSDDD, but also helps strengthen both business relationships and brands in the long run. And there is no reason to wait to get started, says Anna:
- I would like to emphasize the importance of starting the due diligence process on time. That way you can be ready when EU directives like the CSDDD come into force. Expect it to take a while to get the processes in place and make everything work effectively.
Do you want support in your company's due diligence to comply with EU directives such as CSDDD and CSRD? Get in touch with us at Stratsys, we are happy to help.
