The Corporate Sustainability Due Diligence Directive (CSDDD) and Its Impact on Global Supply Chains

The Corporate Sustainability Due Diligence Directive (CSDDD) of the European Union (EU) will significantly reshape how global supply chains are managed, including those linked to Vietnam. Businesses that prepare early, strengthen documentation, and demonstrate credible due diligence systems will be best placed to retain EU customers and secure new orders.

Understanding CSDDD

The CSDDD is a pioneering directive that sets forth comprehensive regulations requiring large companies to identify, prevent, and mitigate human rights and environmental risks across their operations, subsidiaries, and supply chains. This directive aims to establish a baseline for corporate accountability in measuring the impact of business activities on communities and the environment.

Phased Implementation

One notable aspect of the CSDDD is its phased implementation, which will roll out based on the size and turnover of the companies involved:

• Phase 1: Applies to large EU and non-EU companies with a net worldwide turnover of more than EUR 1.5 billion, expected to begin on July 26, 2028.

• Phase 2: Targets companies with more than 3,000 employees and a net turnover exceeding EUR 900 million, scheduled to start in 2028.

• Phase 3: Encompasses smaller firms with more than 1,000 employees and a net turnover of over EUR 450 million, anticipated to take effect in 2029.

These phases indicate the EU’s adaptable approach, allowing companies necessary time to comply with these significant regulations.

Supplier Impact in Vietnam

Though the CSDDD primarily affects companies directly selling into the EU market, its repercussions are likely to extend to Vietnam-based suppliers. As EU firms enhance their procurement strategies, they will expect compliance with stringent labor and environmental practices from their suppliers. This includes thorough documentation to support their practices, increasing the need for Vietnam-based exporters and local subsidiaries of EU companies to align their operations with these expectations.

Due Diligence Requirements

The directive outlines an extensive cycle of due diligence that companies must integrate into their daily governance, procurement, and compliance systems. Key obligations require companies to:

1. Embed Due Diligence Policies: Create and adopt internal policies and codes of conduct that reflect sustainability goals.

2. Assess Risks: Identify and rank potential adverse impacts and take necessary actions.

3. Mitigate Risks: Implement preventive measures while engaging suppliers to ensure compliance with ethical standards.

4. Remediate Impacts: Address any adverse impacts through corrective actions.

5. Provide Notification Systems: Establish channels for grievances and escalation.

6. Monitor and Communicate: Regularly review due diligence effectiveness and transparently share outcomes.

These requirements form a crucial framework for businesses to minimize risks associated with their supply chains.

Compliance Checklist for Vietnam Exporters

As Vietnam-based companies prepare for compliance, they must enhance their due diligence systems. Key actions include:

• Establishing a Due Diligence Policy: Crafting a supplier code of conduct that aligns with CSDDD expectations is essential.

• Risk Mapping: Companies should create a comprehensive list of potential risks, which includes assessing subcontractor relationships and identifying high-risk practices.

• Labor and Environmental Controls: Ensuring that labor conditions, health and safety regulations, and environmental compliance are met is vital.

• Corrective Action Plans: Developing a mechanism for addressing issues as they arise during audits will be crucial in maintaining supplier contracts.

Supplier Documentation Needs

To support these due diligence efforts effectively, suppliers will likely need to furnish comprehensive documentation, including:

• Supplier codes of conduct
• Risk assessments
• Labor conditions reports
• Occupational health and safety procedures
• Environmental compliance records
• Corrective action capabilities
• Grievance reporting processes

This documentation not only fulfills the CSDDD requirements but also builds a foundation for trust with EU buyers.

Key Takeaways for Business Strategy

Even though the CSDDD may initially appear as a burden, it offers a strategic opportunity for Vietnam-based suppliers to align their practices with global expectations. By establishing strong due diligence systems, companies can enhance their competitive edge, protect their relationships with EU customers, and prepare effectively for compliance as requirements come into play.

Understanding and addressing these evolving expectations will position businesses favorably in a changing global market landscape.