Financial Implications and Potential Downsides of CSDDD

The financial implications and potential downsides for businesses are many. Companies will incur significant expenses to ensure compliance with due diligence requirements, including the implementation of new systems, audits, and reporting mechanisms. The directive will lead to higher legal liabilities. Companies could face lawsuits or penalties if they fail to meet due diligence standards, potentially resulting in costly settlements or fines. Investing in the so-called sustainable practices and supply chain transparency will increase operational costs, potentially impacting profit margins, especially for smaller firms that lack resources.
Companies might need to restructure their supply chains to meet compliance, which could lead to disruptions and increased costs in sourcing materials or products. The complexity of the requirements creates a significant administrative burden, diverting resources and attention from core business activities. Smaller businesses will struggle to comply with the directive’s demands, putting them at a disadvantage compared to larger corporations that can absorb compliance costs more easily. New entrants into the market may find it harder to compete due to the stringent due diligence requirements, potentially reducing innovation and competition to the detriment of the consumer. Companies with international supply chains will face challenges aligning various suppliers with EU regulations, complicating global operations.
The EUDR and the CSDDD intersect
In addition to the CSDDD, the Europe Union also has the EU Deforestation Regulation (EUDR), which is part of the EU Green Deal, which aims to make Europe the world’s first climate-neutral continent by 2050. As of 30 December 2024, the EUDR prohibits companies from selling or exporting certain products within the EU unless they can prove that these products are “deforestation-free” and produced in compliance with relevant laws. In other words, if you’re selling or exporting goods to the EU, you better have your deforestation ducks in a row! Here’s where things get interesting: The EUDR and the CSDDD intersect. While the EUDR specifically targets deforestation, it’s just one piece of the larger sustainability puzzle.
Cocoa-producing countries call on EU to delay anti-deforestation law
Cocoa-producing countries have asked the European Union for at least two more years to comply with EU regulation intended to ensure that beans imported to Europe do not come from deforested plots. But despite the mounting pressure, the Commission says it remains focused on implementing the regulation. In a joint declaration signed last week at the headquarters of the International Cocoa Organisation (ICCO) in Côte d’Ivoire, cocoa-producing countries said that implementation deadlines set by the EU were “unrealistic in view of the requirements of the regulation, which range from the geolocation of plots to the establishment of an exhaustive traceability system”.
The EU’s Deforestation Regulation (EUDR) is due to come into force from 30 December 2024 and requires companies seeking to sell designated products to prove they have not been sourced from land deforested or degraded since 2021. With less than three months to go, the ICCO said a traceability system wasn’t yet operational, while the European Commission still had not shared all the necessary documents or activated a data-processing platform involved in implementing the rules.
Nations should extricate themselves from the CSDDD
The European Union is currently facing significant challenges regarding its supply of raw materials, which have become increasingly scarce. This situation is compounded by the financial turmoil that the bloc is experiencing, driven primarily by a series of poorly conceived policy decisions. Inflationary pressures, largely self-imposed, have further exacerbated economic instability within the region. In this context, the potential for businesses and suppliers on a global scale to unite against harmful and costly legislation becomes paramount. Such collective action could potentially reverse current negative trends and foster a more favourable economic environment. To counteract these adverse circumstances, it is crucial for businesses and suppliers across the globe to unite in opposition to harmful and costly legislation that may further impede their operations.
The Corporate Sustainability Due Diligence Directive (CSDDD) will only be effective if it receives the cooperation and compliance of foreign corporations that operate within or engage with the EU market. So, the success of such legislation hinges on the willingness of these entities to adapt and align with its stipulations. Moreover, nations that prioritise the interests of their domestic companies and exporters must take decisive action to disentangle themselves from legislation deemed unreasonable or overly burdensome. This approach is essential not only for the sustainability of their own economic landscapes but also for fostering a more collaborative international trade environment. By defending their businesses against detrimental regulations, countries can create a more favourable climate for economic growth, innovation, and global competitiveness, ultimately contributing to a more balanced and prosperous economic future.
Some EU companies have negative reputations internationally
Remember, several EU companies have faced international criticism or have developed negative reputations due to various issues, including labor practices, environmental harm, or unethical business conduct. Volkswagen gained a negative reputation due to the 2015 emissions scandal, where it was found to have manipulated emissions tests for diesel vehicles, leading to significant legal and financial repercussions. TotalEnergies faced backlash over environmental concerns related to its oil extraction projects in sensitive areas, such as the Amazon rainforest and the East African Crude Oil Pipeline. The chemical giant, BASF, has been involved in controversies regarding pollution and environmental damage associated with its chemical manufacturing processes in various countries.
The fast fashion retailer H&M has faced criticism over labour practices in its supply chain, particularly in countries like Bangladesh, as well as environmental concerns related to the fashion industry. Unilever which claims to promote sustainability, has faced scrutiny over its palm oil sourcing practices, contributing to deforestation and habitat loss in Southeast Asia. Then aerospace company, Airbus has dealt with legal issues, including allegations of bribery and corruption in securing contracts, which have affected its reputation. And don’t even get me started on Nestlé. It has been criticized for various practices, including water extraction issues in developing countries, aggressive marketing of baby formula in areas with limited access to clean water, and sourcing palm oil linked to deforestation.