In recent years, the European Union has introduced new regulations aimed at strengthening corporate responsibility throughout the value chain through due diligence and transparency obligations. Among the most significant are Directive EU 2024/1760 (Corporate Sustainability Due Diligence Directive – CSDDD), Regulation EU 2023/1115 (EUDR), and Regulation EU 2024/1252 (Critical Raw Materials). These regulatory tools require companies to adopt rigorous processes to manage supplier-related risks and their activities, contributing to a transition towards more sustainable supply chains. Below is an analysis of the key obligations imposed by these regulations.

Corporate sustainability due diligence directive (CSDDD)

The Corporate Sustainability Due Diligence Directive requires large companies operating in the EU to conduct due diligence on their suppliers to identify, prevent, mitigate, and account for negative impacts on human rights and the environment along the supply chain.

This entails implementing internal procedures to identify negative impacts, assess risks, and prevent them. If current negative impacts exist, the company must establish remedial mechanisms or, at the very least, aim to reduce their severity.

Companies must also set up grievance mechanisms for anyone who believes their rights have been violated and commit to influencing the behavior of all actors in the supply chain by requiring specific contractual guarantees from suppliers and adherence to certain ESG standards.

A key aspect of the directive is the introduction of civil liability, opening the door to legal action against companies that fail to demonstrate adequate supplier due diligence systems.

Deadline for transposition: by July 26, 2026.

Phased application: starting from July 26, 2027, the following entities will be obligated: (i) EU companies with more than 5,000 employees on average and a global net turnover exceeding €1.5 billion in the last financial year, (ii) non-EU companies generating a net turnover of over €1.5 billion in the EU, regardless of the number of employees, (iii) EU and non-EU parent companies of a group that meets these thresholds on a consolidated basis.

EU regulation 2023/1115 (EUDR)

The EUDR regulation aims to prevent products linked to illegal deforestation from entering the EU market.

Operators and traders making regulated products available in the EU must ensure that the production and cultivation of raw materials were conducted without deforestation practices and in compliance with local regulations. Additionally, they must submit a due diligence statement certifying the completion of the supply chain assessment process.

The raw materials regulated by EUDR include: cattle, cocoa, coffee, palm oil, rubber, soy, and wood.

The impact of EUDR extends beyond sectors directly involved in the cultivation, farming, and commercialization of these raw materials, affecting industries that use them in processed forms, such as leather production in the textile sector.

EUDR affects businesses by:

• Risk assessment of supply chains to identify potential links to deforestation or forest degradation
• Due diligence processes, including geolocation data collection of lands where products are produced, ensuring compliance with local laws
• Periodic reporting to competent authorities to prove that products do not contribute to deforestation or originate from deforested areas
• Full product traceability

Effective date: Initially set for December 31, 2024, it has been recently postponed to December 31, 2025.

EU regulation 2024/1252 (critical raw materials)

The Critical Raw Materials regulation establishes a legal framework for EU Member States aimed at ensuring a secure, sustainable, and resilient supply of raw materials critical to key EU sectors, such as clean energy technologies, digital transformation, defense, the automotive, and aerospace industries.

The regulation’s main goals are to mitigate supply chain risks, increase the extraction of critical raw materials within the EU, and promote circular economy practices.

Raw materials are classified as strategic (SRM) and critical (CRM), listed in Annexes I and II of the regulation, along with the methodologies and parameters required for identifying additional materials in the future. SRM examples include lithium, metallic magnesium, manganese, graphite, and nickel for batteries, rare earth elements for permanent magnets, copper, and aluminum.

By May 24, 2025, and subsequently within 12 months of any updates to the strategic raw materials list, Member States must identify large companies that use SRMs to manufacture energy storage batteries, electric mobility, hydrogen production and utilization equipment, renewable energy production equipment, aircraft, traction motors, heat pumps, data transmission and storage devices, mobile electronics, additive manufacturing equipment, robotics equipment, drones, rocket launchers, satellites, or advanced chips.

These companies will be required to conduct a triennial risk assessment of their supply chains for strategic raw materials, including mapping extraction, processing, and recycling locations, analyzing factors that could affect supply, and evaluating vulnerabilities to supply chain disruptions.

Effective date: May 23, 2023.

How to prepare?

Implementing an effective due diligence process requires a systematic and structured approach. The following steps are crucial for complying with regulatory obligations and ensuring supply chain sustainability:

• Establishing a sustainability culture and embedding this commitment into corporate policies and communication with employees and suppliers
• Conducting in-depth risk assessments and analyzing human rights and environmental impacts across operations and the value chain
• Adopting prevention and mitigation measures
• Monitoring the effectiveness of due diligence measures
• Structuring grievance mechanisms to report violations, manage them, and adopt remedial actions
• Producing periodic reports on risk management progress and impacts
• Engaging stakeholders

The ESG Team at LEXIA is available to assist clients in preparing for new regulatory requirements, providing support in structuring due diligence procedures and navigating complex sustainability-related regulatory challenges.