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Environmental and social risks can arise at various stages of a business’s value chain, from sourcing raw materials to the end of a product’s lifecycle. The EU has introduced due diligence (DD) obligations for specific products groups. These apply particularly to those with supply chains that have higher risks of adverse effects on environmental and human rights. These DD obligations are becoming increasingly onerous.

Looking ahead

Over the course of 2025 to 2027 and beyond, certain businesses will have to implement new policies and procedures to comply with new DD obligations under EU law. It is critical that businesses start preparing for this now, to avoid potential noncompliance and operational restrictions when these obligations take effect.

The EU Batteries Regulation will introduce DD obligations for certain large importers of batteries and products containing batteries. Broadly speaking, the importers will need to comply with the requirements if their individual or group net turnover is at least €40 million. These requirements will apply from 18 August 2025. They will require companies placing the batteries on the EU market for the first time to, amongst other things, adopt and implement a DD policy. The policy must be aligned with certain international standards and integrated into risk management measures, and supplier agreements.

The Corporate Sustainability Due Diligence Directive [1] or ‘CS3D’, will be phased in from 2027.

This will begin with both:

  • EU companies with over 5,000 employees and a net worldwide turnover of more than €1,500 million, and
  • Non-EU companies with over €1,500 million net turnover generated in the EU in the year preceding their last financial year.

Broadly speaking, CS3D requires companies to identify and address potential and actual adverse impacts on human rights and the environment within its own operations. These obligations also apply to a company’s subsidiaries, and, where connected to their value chains, their business partners. As part of this duty, companies must comply with prescriptive requirements such as carrying out stakeholder engagement at different stages of the DD process.

The recently adopted Forced Labour Regulation [2] (FLR) will apply from late 2027. Essentially, the FLR will prohibit products from being imported into or exported from the EU if they were produced by means of forced labour.

Why it matters

Failure to comply with DD obligations carries high risks, which differ according to the legal framework. These include financial penalties and fines, reputational damage, prohibition on selling certain products, as well as damages and other potential enforcement action.

However, complying with DD obligations offers several benefits. It enhances a company’s understanding of its value chain and fosters stronger business relationships and consumer trust. Additionally, rising global standards create powerful incentives to integrate sustainability into value chains.

Preparing for compliance

Businesses subject to the requirements will need to integrate a robust DD policy into their wider management systems and contracts. This is to ensure that appropriate DD enquiries are made by the importer’s own organisation, as well as by its suppliers and customers. Unfortunately, there is currently a lack of practical guidance from the EU and Member States as to how businesses should comply with their obligations. It is hoped that guidance will be published before some of the obligations take effect. However, businesses should not wait for guidance to be issued before commencing their compliance preparations.

For most companies, integrating DD policies and procedures into their wider risk management and business strategy processes can be challenging. A good starting point is to have a clear understanding of an organisation’s value chain. The Board should have oversight of the process to ensure it is implemented. Once the requirements are identified, policies and procedures should be reviewed to identify gaps. It will be important to clearly identify and allocate roles and responsibilities at operational level. This approach will ensure that policies and procedures are implemented in full. Key to compliance will be the gathering of verifiable information from the value chain and ensuring contracts facilitate the gathering and analysis of the information. Companies will need to consider how they will address risks, should they materialise from their DD process.

Conclusion

The EU has introduced further regulation focusing on reducing environmental and social risks in a value chain of certain businesses. The DD requirements are becoming more extensive and prescriptive. In-scope companies will need to identify and review the DD requirements and integrate them into their wider business policies and procedures.

The complexity of a product’s value chain, and the sustainability risks that may arise, mean businesses need to move early to ensure compliance. Although the changes will be a burden in the short term, businesses may be able to realise value in the medium and longer term through establishing sustainable relationships with their value chain and stakeholders.

For more information on the impact of the Regulation on your operations, contact a member of our ESG or Environment teams.

The content of this article is provided for information purposes only and does not constitute legal or other advice.

[1] Directive 2024/1760

[2] Regulation (EU) 2024/3015



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