September 6, 2024
by Giuliana Miglierini
The new EU Corporate Sustainability Due Diligence Directive (EU) 2024/1760 (CSDDD), also known as EU Supply Chain Law, entered into force on 25 July 2024, after being approved by the EU Parliament at the end of April.
The new rules aim to ensure that large companies identify and address along their entire value chains adverse human rights and the environmental impacts of their actions, both inside and outside Europe. The CSDDD is amending the directive on the protection of persons who report breaches of the Union law [(EU) 2019/1937], and Regulation (EU) 2023/2859 establishing a European single access point providing centralised access to publicly available information of relevance to financial services, capital markets and sustainability.
According to the FAQs published by the European Commission, other countries such as Canada and Korea are also considering horizontal due diligence laws, and negotiations are ongoing at the UN level on a legally binding instrument on business and human rights that would also encompass a (mandatory) due diligence.
The CSDD directive aims to overcome the current fragmented situation at the European level, leading to the reduction of legal uncertainty and unnecessary administrative burdens across the Single Market. The EU’s member states have now two years’ time to transpose the Directive into their respective national laws and to communicate the relevant texts to the Commission by 26 July 2026.
All industrial sectors will be impacted by the new rules that will apply to companies according to a gradual phase-in approach. The first to comply in July 2027 will be EU companies with more than 5,000 employees and €1,500 million worldwide turnover, and non-EU companies with more than €1,500 million turnover generated in the EU. One year later (26 July 2028) will be the turn of EU companies with more than 3,000 employees and €900 million worldwide turnover, or non- EU companies with more than €900 million turnover generated in the EU. All other companies with more than 1,000 employees and €450 million worldwide turnover, or non-EU companies with more than €450 million turnover generated in the EU will have to comply by 26 July 2029.
Only larger companies are impacted
As mentioned, companies will be impacted by the CSDD directive based on both a number of employees and financial criteria for large EU limited liability companies & partnerships (approx. 6,000 totally), or just the financial criteria for non-EU companies (approx. 900 totally).
While not directly impacted by the new provisions, small- and micro-companies might fall indirectly within the business partners of larger companies along the value chains and are thus also called to comply with the new rules. Some supporting and protective measures for SMEs have been also included in the directive.
According to the FAQs, large companies should afford costs for the integration of the due diligence into the corporate policies and risk management systems and for operating the process, with respect to both their own operations and the partners in the external value chains.
The identification of adverse human rights and environmental impacts and their prioritisation according to the severity and likelihood is the key target of the mandatory due diligence. The resulting identified negative impacts may refer to the entire life cycle of production, distribution, transport and storage of a product or the provision of a service. They should be addressed where necessary in order of prioritisation by mean of preventive and/or mitigation measures.
The directive also establishes for companies to provide remedies whenever they caused the adverse impact or contributed to it through acts or omissions. A “last resort” measure is also possible in cases of expected severe impacts, should all other actions have failed. In this occurrence, companies are required to suspend or terminate a business relationship in the case these impacts outweigh the foreseeable negative consequences of disengagement.
Large companies are also called to adopt and implement a transition plan for mitigation of climate change, to ensure their business model and strategy are compatible with the transition to a sustainable economy. This includes limiting global warming to 1,5° C in line with the Paris Agreement, and achieving climate neutrality as established in Regulation (EU) 2021/1119, including its intermediate and 2050 climate neutrality targets.
The identification of impacts should also include consultation of the stakeholders. To this instance, companies may use industry or multi-stakeholder initiatives to provide information of sufficient quality and level of detail to allow them to fully participate to the process.
Other provisions of the CSDD directive include the establishment and maintenance of a complaints and notification procedure, and the monitoring of the effectiveness of the implemented measures. The due diligence should also be publicly communicated according to the Corporate Sustainability Reporting Directive and the European Sustainability Reporting Standards.
What falls under the scope of the CSDD directive
The right to life or the prohibition of child labor are typical examples of the human rights ad-dressed by the new CSDD directive; the Annex to the directive provides a list of international human rights and labor conventions, as well as a list of multilateral conventions that might prove useful to identify the possible adverse environmental impacts (i.e. prevent the pollution from ships or avoid/minimise adverse impacts on biological diversity, etc.).
Furthermore, point 15 of the Annex addresses any measurable environmental degradation (i.e. harmful soil change, water or air pollution, harmful emissions, etc.) that impairs human rights or substantially affects ecosystem services that contribute to human wellbeing.
The due diligence duty covers global “chains of activities”, inclusive of both upstream and downstream activities and business partners (i.e. suppliers of raw materials, outsourced manufacturing, transportation, storage, distribution, etc.).
Available standards and supervision
According to the FAQs, the setting up of the due diligence may refer to the 2011 United Nations Guiding Principles on Business and Human Rights (UNGPs) in order to identify adverse human rights impacts involved through the companies’ operations and value chain.
The OECD Guidelines for Multinational Enterprises (OECD Guidelines, 2023), together with the Guidance on Responsible Business Conduct and sectoral guidance, may also prove useful to adequately consider environmental issues. The same is true for the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (as amended in 2022), and several voluntary frameworks. The Commission is also expected to publish specific guidelines on how to run the due diligence.
Implementation of the provisions set forth by the new directive will be monitored by EU’s member states, which are called to designate an authority to supervise and enforce the rules. The authority may also issue injunctive orders and effective, proportionate and dissuasive penalties. A European Network of Supervisory Authorities should be also established to group representatives of the national bodies and ensure a coordinated approach.
Should an intentional or negligent failure to carry out due diligence occur, the civil liability clause establishes that member states are responsible for ensuring that victims get compensation for the resulting damages.
The new Transatlantic partnership for the secure supply of medicines
As reported by Medicines for Europe, July 2024 saw also the signature of a new Transatlantic partnership by the industrial associations representing the generics industry of the United States (Association for Accessible Medicines, AAM), Canada (Canadian Generic Pharmaceutical Association, CGPA) and Europe (Medicines for Europe).
The partnership aims to exploit the respective synergies, for example at the level of the reciprocal mutual recognition agreement on GMP already active between the EU and US and the EU and Canada; many other treaties and agreements on trade, investment and security are also already in place. The long-lasting issue of the critical dependence on third countries would be addressed by leveraging the European industry of active pharmaceutical ingredients and the existing large chemical industries (large scale sterile and biological production facilities, for example, are available on the two sides of the Atlantic). Relevant institutional bodies, i.e. the US Biomedical Advanced Research and Development Authority (BARDA) and EU Health security authority (HERA), are also closely cooperating.
On this basis, the joint initiative will focus on the Transatlantic market, rather than on the respective separated ones. This approach is expected to encourage the exchange of analyses and information, and to improve collaboration for investment in R&D, capacity expansion, manufacturing and sustainable market policies.
The key actions announced by the three associations include the development of solidarity-based mechanisms to avoid situations of export restrictions that might impact the bilateral supply chain of medicines during health crises. In the regulatory domain, the initiative aims to the introduction of a Single Development Programme for complex generic medicines, that should allow to better address patient needs while eliminating duplication of studies and reducing inefficiencies in development programmes. International regulatory harmonisation is also deemed important to improve patient access.
The new Transatlantic medicine security partnership reflects the recent indications to strengthen the liaisons between the two sides of the Atlantic coming from the EU Parliament, the European Council and the 2023 EU-Canada Summit joint statement.
The partnership should see the EU-US Trade and Technology Council as the appropriate forum to discuss key global trade, economic and technology issues on how to secure the supply of medicines between the EU and the US. A similar discussion is already undergoing with Canada, at the level of the EU-Canada Joint Cooperation Committee established under the CETA trade agreement. According to the note, the role of (bio-)pharmaceuticals and active (bio-)pharmaceutical ingredients should gain an increasing interest, on the basis of the respective strategic value.
Off-patent medicines represent the great majority of critical medicines in the EU, US and Canada. In Europe, for example, 90% of medicines listed in the EU Critical Medicines List have a generic or biosimilar product on the market. Trades across the two sides of the Atlantic are highly significative; chemical and pharmaceutical products, for example, represent 24% of EU exports to Canada and 17% of EU imports from Canada. Furthermore, 90% of medicines prescribed in the EU, 70% of those prescribed in the US and 77% of the prescriptions in Canada refer to generic or biosimilar products.
On the other hand, all the three markets suffer a difficult situation for the generic industry, due to unsustainable pricing and procurement policies, mainly based in the EU on the lowest price criterion. The recent launch of the Critical Medicines Alliance by the European Commission represents a first answer aimed at reinforcing manufacturing in Europe and creating strategic partnerships to improve the security of supply. The US too has already activated some projects to reduce manufacturing dependencies. The new partnership should allow for a better sustainability of these initiatives, on the basis of increased scale and volumes of production.