EU Supply Chain Due Diligence Act Officially Enforced in 2024
46% Respondents Not Preparing for Due Diligence Law
Small Businesses Likely to Have Even Less Capacity to Respond
[Asia Economy Intern Reporter Seohee Lee] In February this year, the European Union (EU) announced the ‘Supply Chain Due Diligence Directive,’ but it has been found that domestic companies are slow in preparing for ESG (Environmental, Social, and Governance) supply chains. It is pointed out that preemptive measures are necessary as the financial and legal burdens on domestic export companies trading with EU countries are expected to increase once the supply chain due diligence law is enforced.
On February 23, the EU officially released the draft of the ‘Corporate Supply Chain Due Diligence Directive.’ According to the guidelines published by the EU, the targeted companies are obligated to conduct due diligence on the entire supply chain’s environment, labor, human rights, and governance. If any issues are found during the due diligence process, they must disclose them and find ways to respond. The law is scheduled to officially take effect in 2024. Accordingly, domestic export companies trading with EU countries that exceed a certain sales threshold are expected to fall under the scope of the due diligence law.
The timing of the directive’s application varies depending on the company size. Companies with more than 500 regular employees and sales exceeding 150 million euros will be subject to the law starting in 2024, while companies with sales over 40 million euros and more than 250 regular employees will be subject starting in 2026, with a two-year grace period. According to an analysis by the Korea Trade-Investment Promotion Agency (KOTRA), about 110 domestic export companies fall under the scope of application.
Global companies are already responding swiftly. Swedish apparel company H&M, which publishes sustainability reports annually on its website, announced in its ‘2021 Sustainability Report’ that it aims to reduce carbon dioxide emissions by 50% by 2030 and achieve net zero by 2040. To realize this, it also revealed plans not to cooperate with new supply chains that install coal boilers in factories. British insurer Aviva plans to consider how invested companies handle labor and human rights issues during the selection process.
In contrast, domestic companies’ preparation is relatively slow. According to a survey conducted by the Korea Chamber of Commerce and Industry (KCCI) in December last year targeting 300 domestic companies, 46% responded that they are ‘not preparing’ for the EU’s mandatory supply chain due diligence. Only 21% answered that they are ‘preparing.’ Especially, industries with high export proportions such as construction, shipbuilding, and machinery are expected to be relatively more affected.
A KCCI official stated, “When the EU supply chain due diligence law is enforced, domestic companies will be directly and indirectly affected. Large companies are in a relatively better position. However, small and medium-sized enterprises, which lack resources, manpower, and experience, have limited capacity to respond, so government-level support is urgently needed.”
Meanwhile, the European Korean Business Association, representing over 360 companies operating in Europe, submitted a statement to the EU Commission through its Brussels branch on the 11th, urging that the corporate burden be minimized. The statement included ▲ narrowing the scope of supply chain due diligence obligations ▲ establishing an EU-level standardized due diligence reporting system to minimize corporate burdens ▲ drafting guidelines for compliance with due diligence obligations ▲ clarifying key concepts of the legislation.
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