Indian businesses must brace for EU sustainability push

The EU is going a step further, by introducing its Corporate Sustainability Due Diligence Directive. Once passed by the EU Council and Parliament (most likely by early 2023) and codified as national laws by EU member states, large European firms will be held liable for human rights and environment-related violations in their global value chains. It is vital that Indian companies evaluate the implications of these measures on their own operations and the future of their business.

The EU is India’s second largest export destination. This means that Indian companies will have to adapt their operations to meet legal requirements under new EU laws on corporate sustainability. If their Indian value-chain partners falter on human rights or environment-based compliances, large EU companies will face financial, reputational and legal costs. In a nutshell, our suppliers, contractors, buyers and exporters to large EU companies risk losing trust and business if they do not keep up with evolving EU sustainability standards.

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For example, if child or forced labour is found within the operations of an Indian company exporting garments to a company covered under this proposed directive, the EU company will be required to pay a fine, and would also be open to legal action by victims of such violations.

How EU companies are impacted: EU companies that are covered under the current form of the proposed directive (that is, limited-liability companies with over 250 employees and over €150 million in net global turnover or €40 million in case of companies operating in “high impact sectors") are going above and beyond to protect themselves. They are putting in place robust mechanisms to mitigate any possible risks. This means clear contractual clauses, establishment of complaint procedures, increased third-party assessments, and capacity building, among other moves. Non-EU companies that are active in the EU and meet the above criteria are also covered.

How Indian trade would be impacted: The EU will undoubtedly play a central role in India’s vision to achieve $1 trillion in exports by 2027-28. In 2021-22, India’s bilateral trade with the EU amounted to €88 billion, with an annual growth of 43.5%. The EU predominantly purchases textiles (17.8%), chemicals (15%), machinery and electrical equipment (13%) and agricultural products (7.9%). Importantly, about 6,000 European companies are present in India, which provide over 1.7 million direct jobs and 5 million indirect jobs across sectors.

Alongside the UK, India has also resumed its free trade talks with the EU after nearly a decade. While India’s current geopolitical advantage provides opportunity, it needs to strengthen its sustainability efforts to stand on equal footing with the EU and other developed countries with which it is pursuing free trade talks, such as Canada and Switzerland.

Child labour and trafficking in India: There were over 11 million child labourers in India as per the 2011 Census. Covid and its impact on economic security and education led to an increase in these numbers. A large number of these children fall somewhere within the blind spots of corporate supply chains.

While gaps in prosecution for violations and rehabilitation of victims remain, the good news is that Indian laws and institutional capacity with respect to child labour have significantly improved over the last decade. Indian Parliament is also slated to pass a comprehensive anti-trafficking law. This places India uniquely in the Asian ecosystem to capture a larger opportunity in the EU market, and extend its competitive edge globally.

How Indian companies can prepare: The time is right for the government and corporations to transparently and objectively evaluate our sustainability systems and improve on them.

First, companies must establish clear and transparent contractual clauses with all tiers of suppliers, contractors and sub-contractors for risk assessment and mitigation, disclosure and remediation for human-rights violations. Second, internal audit and training exercises should percolate to the lower tiers of the supply chain, where maximum risk lies. Third, companies can introduce greater technology and automation to help reduce tiers, informality and fragmentation in supply chains. And lastly, partnerships with third party experts and the government can help integrate existing best practices in their operations. These measures will also be welcome among investors committed to environmental, social and governance (ESG) principles.

With buy-in across EU governments and large corporations based in Europe (for example, the H&M group, Unilever, Adidas and Nestle among many others), there is an urgency within the European Parliament and Council to adopt the proposal. On 14 September, the EU Commission also moved a proposal to ban all products made with forced labour in the EU market.

With stronger international laws and greater prioritization of human rights and environment-related impacts in their overseas trade relationships, Indian companies must buckle up and prepare for a global market moving speedily towards greater sustainability.

Niharika Chopra is founder of Faircorp and former director of the Office of Nobel Laureate Kailash Satyarthi.

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