The EU’s sustainability directive may weaken trade ties

Indo-Pacific Economic Framework (IPEF) partners envisage building resilient, efficient, productive, sustainable, transparent, diversified, secure, fair and inclusive supply chains.
Indo-Pacific Economic Framework (IPEF) partners envisage building resilient, efficient, productive, sustainable, transparent, diversified, secure, fair and inclusive supply chains.

Summary

  • Its mandate may be well intended but it has some weaknesses that must be fixed by European Parliament.

The European Council recently approved the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), a due-diligence requirement that creates a legal liability for EU-based firms arising from any environmental and human-rights violations (including labour rights) within their supply chains. The CSDDD awaits a nod from the European Parliament, which is going for elections in June. Indian exporters are still grappling with the European Union’s Carbon Border Adjustment Mechanism (CBAM) that will effectively tax our carbon-intensive industries serving EU markets. The CSDDD might not only add to that financial burden, but also result in a loss of EU business for Indian firms.

The EU directive aims to anchor human rights and environmental considerations in the operations and corporate governance of companies. The new mandate is expected to have a ripple effect. It extends to the operations of companies and their subsidiaries, including all activities along their value chain, thereby covering both upstream and downstream business partners.

Upstream business partners include suppliers of goods and providers of services to a compliance-bound company—be it related to design, extraction, sourcing or the manufacture of a product or fulfilment of a service—among others. Many industries in developed countries rely on suppliers in the Global South for reasons like cheap labour, business incentives for the set-up of manufacturing units in other countries and other cost advantages that can allow competitive pricing. India exports both raw materials and manufactured products, as well as many services, to the EU. In 2021, the most imported manufactured goods into the EU from India were ‘other manufactured goods’ (47%), followed by machinery and vehicles (19%) and chemicals (19%). By value, the EU that year was the second-largest destination for Indian exports (14.9% of the total). Prima facie, the CSDDD will cover all goods and service companies associated with such exports, including MSMEs.

The directive employs international law standards for assessing the human rights impact of corporate activity. This parameter is applicable throughout the supply chain. The parameter suggested for environmental compliance goes beyond bio-diversity restoration to include any measurable environmental degradation, such as harmful soil change, water or air pollution, and any other impact on natural resources (caused, for example, by deforestation). It also incorporates the World Health Organization’s ‘One Health’ approach to sustainably balancing the health of people, animals and ecosystems. These norms are stricter than what are currently applicable in India, especially those related to the environment.

On its part, India expects to streamline its supply chains and factories to counter contingencies like the CBAM and CSDDD.

Meanwhile, in February, the Indo-Pacific Economic Framework (IPEF) supply chain agreement came into force. Supply chain resilience is one of its four pillars. The agreement primarily aims to curb supply chain vulnerabilities that covid and ongoing wars have exposed. In addition, IPEF partners also envisage building resilient, efficient, productive, sustainable, transparent, diversified, secure, fair and inclusive supply chains. These call for both environmental and labour-centric measures. The latter includes the creation of a Labour Rights Advisory Board that will have workers alongside employers and the government to ensure these rights are upheld. India’s government has begun operationalizing the agreement and is expected to align its mandate to comply with the CSDDD too.

The CSDDD can drive positive business externalities for India by attracting foreign direct investment from the EU through local adherence to human rights and environmental standards. It can promote sustainable business growth. However, actions deemed sustainable domestically may not meet CSDDD standards, as seen in criticism of India’s Green Credits Programme’s tree plantation guidelines. These have been faulted for not recognizing the ecological value of non-forest habitats and potentially encouraging deforestation. The CSDDD could ensure that India’s carbon credit mechanism aligns with global sustainability standards.

The Union ministry of corporate affairs laid out a ‘zero draft’ for a National Action Plan for Business and Human Rights to protect these rights and promote socially responsible business. Human rights and environmental protection are part of it, but the plan is still under development.

The CSDDD adopted by the European Council is a watered-down version of the original proposition. This version raises the thresholds for industry applicability and makes its core responsibilities an “obligation of means." This mandates companies to implement “appropriate measures" for due diligence, aimed at mitigating adverse impacts. These, however, are dependent on various factors—such as the type of business and its geographical location—which offer companies loopholes to avoid accountability, especially in the context of external constraints (factual or legal) in third countries. Also, the directive does not address the issue of support for partner firms in developing countries expected to meet high sustainability standards. We can only hope that the European Parliament’s final passage of the CSDDD will tackle these issues, especially those affecting the Global South.

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