European companies are scrambling to align with the CSDDD, facing hurdles in resources and supply chain transparency.
Across Europe, a massive shift is underway as businesses gear up for the staged introduction of the Corporate Sustainability Due Diligence Directive (CSDDD).
This new EU directive is not merely a regulatory framework; it represents a pivotal moment for companies to rethink and reshape their operations towards more sustainable and responsible business models.
In a recent study conducted by EQS Group and the University of Applied Sciences Ansbach, it’s evident that while firms are gearing up for compliance, they are hitting significant roadblocks.
Main challenges highlighted include a stark deficiency in both the workforce and financial capacity to meet the demands of the CSDDD.
According to the survey, issues such as documentation, reporting obligations and a lack of visibility into the supply chain are potent challenges.
Alarmingly, only about 30% of the surveyed entities are planning to allocate more resources like budgeting, personnel or IT tools to conquer these obstacles and fulfil the requirements set by CSDDD.
Heightened risks in extended supply chains
With the CSDDD becoming EU law earlier this year, firms are now legally required to identify, prevent and mitigate any negative social and environmental impacts within their operations and, critically, within their supply chains.
EU member states have a two-year window to implement this directive, with supervisory bodies being set up to oversee compliance.
Companies failing to adhere to the regulations could face penalties up to 5% of their global turnover.
Companies must adhere to compliance deadlines based on their size and turnover.
- 5,000+ employees or €1.5bn+ turnover – by 2027
- 3,000+ employees or €900m+ in turnover – 2028
- 1,000+ employees or €450m+ in turnover – 2029
While firms are reasonably confident about managing risks within their direct operations — 84% cite a low risk — the perceived risk escalates considerably further down the supply chain.
For indirect suppliers, more than half of the businesses (55%) perceive high to very high risks of human rights and environmental breaches, with 41% deeming it a medium risk.
“The deeper you go into the value chain, the more complex the risks become,” says Professor Dr. Stefanie Fehr, lead researcher of the study at Ansbach University.
“This poses significant challenges for businesses seeking to comply with the new regulation, and requires a proactive, risk-based approach.”
Integrating ESG into business risk management
The research also highlights that despite the constraints in resources, an increasing number of companies are prioritising environmental, social and governance (ESG) criteria in their supply chain strategies.
Roughly 68% of the surveyed firms have incorporated human rights and environmental considerations into their risk management frameworks, essential for selecting suppliers ethically and responsibly.
Among these companies, 26% are leveraging digital tools to enhance their risk management capabilities, underscoring the crucial role of technology in ensuring compliance.
ESG issues are increasingly viewed as not just compliance requirements but as fundamental elements that shape business relationships, practices, and risk management strategies.
“The complexity of global supply chains presents not only challenges, but also significant opportunities to build a more sustainable infrastructure,” adds Achim Weick, Founder and CEO at EQS Group. “The CSDDD, as well as the German Supply Chain Due Diligence Act, offers an opportunity for companies to strengthen the trust of business partners and customers.
“By investing in transparency and responsibility now, companies can gain a lasting competitive advantage. To fully capitalise on this, further investment in technology solutions will be crucial to compensate for staff shortages.”
