New EU Guidance Covers Reporting Expectations Under Supply Chain Due Diligence Rules
New EU guidance released this week offers insight into how the bloc will implement its sweeping new corporate sustainability due diligence rules, including how member states should decide whether traders do enough to collect required supply chain information.
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Fifty-two pages of frequently asked questions issued by the European Commission Aug. 7 are meant to “reduce the administrative burden” companies will face as the new rules take effect for some companies in 2025, and for others over the coming years (see 2405240031), the commission said. The FAQs will also “further reduce the need for companies to seek external legal or consultancy advice for applying the rules,” EU Financial Services Commissioner Mairead McGuinness said.
The FAQs cover what due diligence reporting requirements companies will have to meet under the law, which is designed to root out negative human rights and environmental-related issues in supply chains, including forced labor. The FAQs also cover when the rules will begin applying to certain businesses, various reporting exemptions, possible penalties for violators, and clarify when European companies may report estimates of supply chain information from suppliers rather than give specific details.
The EU said it’s expecting companies to undertake “reasonable effort” to collect information from “actors” in their supply chains and report that information under the new directive, but it also noted that companies may face challenges collecting that specific information. An EU business may be limited by “contractual arrangements” or by the “level of control it exercises” on its supply chain. In those cases, “obtaining value chain information may be more challenging,” the FAQ said.
If they’re facing challenges, companies can report “estimated” value chain information “by using all reasonable and supportable information, such as sector-average data and other proxies.” The EU is expecting companies to “more frequently” turn to these reporting estimates rather than exact details in the “first years” of the new law taking effect, but it said estimates should be less common “as the ability of undertakings and the actors in their value chains to share sustainability information improves over time.”
It also said smaller companies may have more leeway in reporting estimates than larger companies with more compliance experience. “What constitutes reasonable effort for a larger undertaking with a large number of suppliers for multiple different products, and/or with supply chains that comprise many tiers, might be considered unreasonable for a smaller undertaking with a similarly complex value chain,” it said.
The bloc also said it may determine whether a company took reasonable efforts to collect information by analyzing whether the company could have used “digital” supply chain tools. Those tools are “likely to be limited in the first years of applying” the new law, but they “should improve over time,” the commission said, “including as a result of the voluntary SME sustainability reporting standards currently being developed by” the private European Financial Reporting Advisory Group.
“This means that undertakings are more likely to have recourse to the use of estimates in the first years of applying" the new sustainability reporting rules "than they will do in later reporting cycles,” the commission said.
EU countries should also look at whether a party in the supply chain that’s being asked to provide information is a smaller business that “may not have the necessary resources to easily and quickly provide the information that may be of interest to the reporting” European company. That will make it “harder for the reporting undertaking to gather the necessary value chain information,” the commission said, so the EU company “is therefore more likely to have recourse to the use of estimates.
“In general,” it said, “the application of reasonable effort by the reporting undertaking should not result in expectations on the actor in the value chain to apply unreasonable effort.”
EU companies will also face greater challenges reporting specific supply chain details if they can only collect that information from a party further down the supply chain, the commission said. “Less effort is usually required to obtain information from a tier 1 supplier or a direct customer than from other actors in the value chain,” it said, adding that the “proximity” of the “actor in the value chain to the reporting undertaking may be a consideration in determining what constitutes reasonable effort.”
The FAQs also touch on possible penalties for violators, reiterating that member states are expected to “have in place penalties that are effective, proportionate and dissuasive for cases of non-compliance."