The European Commission (EC) recently proposed a new directive on Corporate Sustainability Due Diligence that seeks to minimise human rights and environmental harms across global value chains.
The directive, which is currently in draft form and therefore remains subject to further scrutiny and approval, is expected to have far-reaching implications for companies across all major industry sectors, both within and outside of the EU.
Establishing sustainable and responsible corporate practices
Adopted on 23 February 2022, the proposed Directive on Corporate Sustainability Due Diligence seeks primarily to require large companies to implement sustainable and responsible corporate practices, built around a shared understanding of and respect for human rights and environmental considerations.
The rules set out by the regulation will ensure that businesses take responsibility for the consequences of their actions, both directly, and more broadly, across the entirety of the value chain.
If adopted in its current form, companies will be required to identify, eliminate, mitigate, and prevent negative environmental and human rights issues stemming from their own actions, as well as those of their subsidiaries and stakeholders. For certain large businesses, more specific rules apply, such as the requirement to align their corporate strategy with the Paris Agreement, by limiting global warming to 1.5 degrees Celsius.
The directive also allows for sanctions to be imposed in the event of non-compliance with the obligations and assigns duties to the directors of involved EU companies. These duties include initialising and overseeing the due diligence process and building it into the corporate fabric of the business. Once approved by the European Parliament and Council, member states will be given two years to transpose the directive into national law and share the necessary information with the Commission.
Far-reaching: Regulation will apply to almost 17,000 business & their value chains
In terms of scope, the new rules will apply to around 12,800 large EU limited liability companies. Over three quarters of these (9,400) are those exceeding 500 employees and a net €150 million turnover, while the remainder are companies in ‘high impact sectors,’ (see below) with over 250 employees and a net turnover of €40 million.
While small and medium enterprises (SMEs) are exempt, some 4,000 third country enterprises will also be liable under the regulation. The directive will not only apply to Europe-based companies but will also apply indirectly to several global businesses that operate and generate a proportion of their turnover within the EU.
“Although some NGOs have claimed that less than 1% of EU companies would be caught within the scope of the bloc’s Corporate Sustainability Due Diligence proposal, this claim underplays the potential impact of the legislation for both large and small EU businesses,” said Viviana Spaghetti, COO and head of European Affairs at Whitehouse Communications, policy advisor to The European Specialist Sport Nutrition Alliance (ESSNA), among others.
It is worth noting that the directive will also apply to the ‘value chains’ of these companies, which means that many small and medium enterprises (SMEs) will also likely be impacted.
“Many SMEs will likely need to adhere to the environmental and human rights obligations of the directive if they wish to retain their contracts with larger companies under the legislation’s direct scope,” Spaghetti said.
From fish oil to botanicals: Many nutraceuticals are ‘high impact’
To what extent might these new rules apply to the nutraceutical and supplement industries?
The directive identifies several ‘high-impact sectors,’ including but not limited to agriculture, forestry, fisheries (including aquaculture), the manufacture of food products, and the wholesale trade of agricultural raw materials, live animals, wood, food, and beverages, as well as textile manufacturing.
“Taking into account the above, the nutraceutical and functional food and ingredient multinational companies would be largely impacted by the directive, considering that it applies to the company's own operations, their subsidiaries and their value chains (direct and indirect established business relationships),” said David Pineda Ereño, managing director at DPE International Consulting and expert in food supplement regulations.
In this sense, it is important to note that nutraceutical and functional food and ingredient companies also exist as smaller subsidiaries to larger food corporates, or have merged or are merging, likely fulfilling the turnover criteria.
“A particular focus would indeed be in the functional ingredient companies, supplying a broad range of ingredients, between vitamins and minerals, to fish oils or probiotics to food for human consumption and animal feeding companies. However, those small and medium enterprises (SMEs), many of which exists in the nutraceutical sector, would not be directly in the scope of this proposal,” Pineda Ereño explained.
Tackling environmental and human rights impacts should be a priority for businesses
Minimising the human rights, and more prominently, environmental harms associated with the global food industry has been a key priority for EU lawmakers over recent years.
An example of this, the European Union’s Green Deal and its Farm to Fork strategy, presented in 2019, seek to improve diets and reduce food loss across Europe, while at the same time improving the resilience of food systems and achieving carbon neutrality by 2050.
Given this focus on the environmental and human rights, the new legislation is likely to have an equally significant bearing on businesses across the food supply chain.
“With the legislation specifically highlighting agriculture as a high impact sector for environmental damage and human rights abuses, large food and drink businesses will particularly need to implement effective due diligence procedures to ensure that their suppliers adhere to several key international conventions,” Spaghetti said.
“Both large and small companies across the sector should ensure that they stay ahead of the curve by adequately analysing and addressing the potential adverse impact of their business activities, in line with policymakers’ political priorities.”