Consumers have begun to put their money where there mouth is by choosing to spend their paychecks with companies engaging in some sort of activism initiative.[1] A 2020 study showed that “consumers are four to six times more likely to buy from, trust, champion, and defend companies with a strong [p]uropse.”[2] The growing value consumers are placing on corporate transparency and activism have revealed the dark labor practices that infect many global companies at several levels of their supply chains.[3] Many jurisdictions have responded to this concern by enacting legislation aimed at forcing the hands of corporations to engage in more ethical labor practices.[4] Recent developments in European Union (“EU”) legislation—particularly the Corporate Sustainability Due Diligence Directive (“CSDDD” or “the Directive”) and the EU Forced Labour Regulation (“FLR” or “the Regulation)—have increased human rights protections in labor law through more ethical supply chains.[5] However, the European legal framework remains imperfect with space for further improvement.[6]
The Directive entered into force on July 25, 2024; it established a framework for companies operating in the EU to “address risks” associated with human rights and the environment arising within their supply chains.[7] The environmental issues will not be specifically addressed in this article. The Directive provides guidance and lists obligations for potential and existing adverse impacts of a company’s conduct.[8] This includes the required due diligence policy.[9] The policy must include: a description of the company’s approach to due diligence with the Directive, a company code of conduct, and all direct and indirect business partners with a description of how compliance with the Directive is verified.[10] EU Member States must incorporate the Directive’s requirements into their national laws within two years after it enters into force; companies are required to comply on a schedule, depending on its size and financial state, beginning in 2027.[11]
Germany has established a basic framework to assist in integrating the Directive into their national laws through the National Supply Chain Act.[12] The Directive, however, is stricter than their national law.[13] So while companies are accustomed to sustainability regulation, they will have to prepare for harsher standards over the next two years.[14] The majority of Member States do not have the luxury of building on their pre-existing framework.[15] Germany provides an effective example for them to follow.[16] Only time will tell how Member States will integrate the freshly-promulgated Directive into their national legal scheme.
While the Directive requires Member States to implement their own legal regime to accommodate its mandate, the Regulation will automatically apply to companies without requiring Member States to ingrain the concepts in their own laws.[17] The Regulation went into force during the summer of 2024; it will require companies to comply by 2027 or 2028.[18] The Regulation bars “products made with forced labor from being placed on the EU market,” or the same products from being exported from the EU, and will apply to “all industry sectors and products, regardless of origin.”[19] Even though the Directive and the Regulation will be enforced differently, they will both carry harsh penalties for violations including pecuniary penalties, that are at least five percent of the company’s “net worldwide turnover,” accompanied by a public statement of the violation by the applicable supervisory authority.[20] For the largest global companies, the value of the penalty could be crippling.[21]
Because the United States—along with many countries across the world—does not have similar laws addressing labor and sustainability issues within company supply chains, companies operating internationally will have to adjust their business practices to comply with these EU laws.[22] The EU is a powerful and lucrative market for international companies, so it would likely be ill-advised to pull out of an EU member state entirely in order to avoid complying with the laws.[23] For most international companies, the associated financial loss would far outweigh the cost necessary to comply.[24]
Because leaving the EU market altogether is not feasible, international companies should begin to assess their current policies and business models in pursuit of a plan to comply with both the Directive and the Regulation.[25] One method of compliance entails the non-EU company adjusting their entire supply chain and business model to comply with the EU laws, regardless of where they are doing business.[26] This could be the most efficient option, because it would involve using the same supply chain globally.[27] In this situation, a global company would be barred from selling products made using forced labor in any market around the world.[28] While it is idyllic that companies not use forced labor at all, the reality is that some companies still do; otherwise, there would not be a need for the Regulation.[29]
Global adjustments could cause more cost than would otherwise be spent tailoring the supply chain to specific markets.[30] Another available method use is to have different supply chains specifically tailored to the markets a company operates in.[31] Most global companies will have the capital to be able to follow this method, so it is likely the most cost-effective for most.[32] Companies would still be able to sell products in markets that they otherwise could not sell within the EU, without losing EU business entirely.[33] Because the Regulation requires compliance in 2027 or 2028, global companies have ample time to strategize how they will allocate inventory based on how their products are made.[34]
I suggest that global companies start to re-organize their supply chains to comply with the Regulation for business conducted within the EU, while allowing for products otherwise banned under the Regulation to be sold in non-EU markets. As for the Directive, since companies will already have to create a due diligence policy and corporate framework to comply, it is advisable to make such policies available to the entire organization; then, leadership may consider not enforcing them in non-EU markets. It is difficult to assess what implementation will look like, because it will be dependent on the domestic laws of the Member States. It would be best to have general policies that align with the Directive, which can be adjusted to national laws as they are rolled out. Because consumers are flocking to companies that stand for a purpose outside of increasing shareholder value, it is in a global company’s best interest to consider aligning with the Directive and Regulation internationally in order to maintain a loyal customer base.
[1] See Afdhel Aziz, Glob. Study Reveals Consumers Are Four To Six Times More Likely To Purchase, Protect And Champion Purpose-Driven Companies, Forbes (June 7, 2020),https://www.forbes.com/sites/afdhelaziz/2020/06/17/global-study-reveals-consumers-are-four-to-six-times-more-likely-to-purchase-protect-and-champion-purpose-driven-companies/?sh=5f25426c435f.
[2] Id.
[3] See Kailynn Bowling, How Corp. Resp. Is Influencing Consumer Buying Decisions, Forbes (May 2, 2022), https://www.forbes.com/councils/theyec/2022/05/02/how-corporate-responsibility-is-influencing-consumer-buying-decisions/.
[4] See EU Forced Lab. Regul. Enters Into Force, Covington: Alert (Dec. 20, 2024),https://www.cov.com/en/news-and-insights/insights/2024/12/eu-forced-labour-regulation-enters-into-force.
[5] See id.
[6] Id.
[7] Anke C. Sessler et al., Corp. Sustainability Due Diligence Directive: What Companies in Germany Need To Know, Skadden Publ’n (July 25, 2024), https://www.skadden.com/insights/publications/2024/07/corporate-sustainability-due-diligence-directive.
[8] Id.
[9] Council Directive 2024/1760, of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending (EU) 2019/1937 and Regulation (EU) 2023/2859, art. 1, 10, 11, 2024 O.J. (L Series) (EU).
[10] Id. at ¶ 39.
[11] David Lakhdhir, The EU Due Diligence Directive: Implications for U.S. Companies, Am. Bar Assoc. (July 15, 2024), https://www.americanbar.org/groups/business_law/resources/business-law-today/2024-july/eu-due-diligence-directive-implications-us-companies/; Sessler et al., supra note 7.
[12] Anne-Marie Weber, Expanding the Toolbox of Sustainable Bus. L.: The Transnational Impacts of the EU Corp. Sustainability Due Diligence Directive (CSDDD), 42 Pace Env’t L. Rev. 155, 161 (2024).
[13] Sessler et al., supra note 7.
[14] Id.
[15] Id.
[16] Weber, supra note 12, at 161.
[17] Supra note 4.
[18] Justin Smulison, The Human Cost – 2 new EU laws aim to reshape glob. Bus. by enforcing ethical supply chains, focusing on human rights and sustainability, Best Lawyers (Oct. 21, 2024), https://www.bestlawyers.com/article/new-eu-laws-change-global-business-forever/6179.
[19] Id.
[20] Id.
[21] See generally Council Directive 2024/1760, supra note 9.
[22] See Lakhdhir, supra note 11.
[23] See The European Union’s Trade and Inv. Footprint in the United States, European Comm’n (2023), https://trade.ec.europa.eu/eu-footprint-us/download/infographic_2023_US_EU.pdf.
[24] See id.
[25] Weber, supra note 12, at 161-62.
[26] See Lakhdhir, supra note 11.
[27] See id.
[28] Id.
[29] Dan Viederman, Urgent action against forced labour is possible. Here’s how, World Econ. F. (Jan. 9, 2025), https://www.weforum.org/stories/2025/01/forced-labour-business-action/.
[30] See Lakhdhir, supra note 11 (many small companies are likely to be indirectly impacted).
[31] See id.
[32] See id.
[33] Id.
[34] See Smulison, supra note 18.
