EU Supply Chain Act: Meeting the compliance challenge and creating an optimization opportunity with process intelligence

What is the EU Supply Chain Act, and how will it affect you?

The European Union Corporate Sustainability Due Diligence Directive (CSDDD) – better known as the EU Supply Chain Act or sometimes called CS3D – will establish a corporate due diligence duty for sustainability. The Act’s language has been drafted, debated, informally agreed, rejected, and amended until finally it was endorsed by enough EU representatives on March 15, 2024. Next, it will go to the European Parliament for a vote that’s expected by the end of April.

The EU Commission has a summary of the CSDDD on its website, but Axel Voss, MEP and coordinator for the EPP, shared the updated CSDDD draft provided to the Parliament by the European Council in a LinkedIn post.

The CSDDD will affect companies based in the EU that have 1,000 employees and turnover of 450 million euros or more, as well as non-EU companies that do a certain level of business within the EU. But because this legislation is all about supply chain due diligence, it will affect not just individual companies but also the subsidiaries, suppliers and partners with whom they do business (both inside and outside the EU).

This means that companies don’t just have to make sure their own operations meet the standards set by the CSDDD. They could also find themselves on the hook for the actions of suppliers who fall short in sustainability areas related to the environment, climate change, and human rights.

As Janina Bauer, Global Head of Sustainability at Celonis, put it: "The EU Supply Chain Act marks another important milestone on the road to ethical and responsible corporate governance. One of the major challenges for many companies will be not only to collect the relevant information across their entire supply chain (or to obtain it from specialized providers such as IntegrityNext or Ecovadis), but also to maintain the data continuously and as automatically as possible and to build strong long-term relationships with suppliers. This is necessary in order to fulfill the new obligations efficiently.”

What will companies be required to report?

An article by PwC summarizes the requirements as follows: “The companies in scope are required to implement a sustainability due diligence policy, identify and address negative consequences for human rights and the environment, establish a complaints procedure, conduct regular monitoring and evaluations, and make evaluation results public, while certain organizations must also develop a climate plan aligned with the Paris Agreement. These obligations extend to the company’s supply chain partners upstream as well as downstream, including distribution and recycling.”

How will CSDDD be enforced?

Environmental or human rights violations under CSDDD (in its current form) could be met with financial penalties including fines of at least 5% of a company’s global net turnover.

The analysis from PwC also states: “As a final measure, companies will be required to terminate business relations with partners that are found to have adverse impacts when these cannot be prevented or remedied.”

The CSDDD draft also outlines a number of civil enforcement measures that may be called upon, as well as ways in which affected parties will be supported if they choose to seek justice – by initiating claims within a window of at least five years following concerns about adverse impacts. For example, “claimants will benefit from limited requirements for evidence disclosure, the implementation of injunctive measures, and reduced costs associated with legal proceedings.”

We’re also likely to see companies’ performance against CSDDD requirements become a factor in the selection process for public contracts and concessions.

An opportunity to optimize supply chains and achieve sustainability goals

The CSDDD is one of several sustainability-related laws that have taken effect recently.

For example, the German Supply Chain Due Diligence Act (SCDDA), which went into force on January 1, 2023, establishes a set of due diligence obligations to prevent violations of human rights and environmental obligations within their own business and within their supply chain. And the Climate Corporate Data Accountability Act, requires companies that do business in California, with revenues of over $1 billion, to publicly disclose their greenhouse gas emissions from 2026 onwards.

Long story short, compliance pressures aren’t getting any lighter, but meeting corporate sustainability goals shouldn’t just be about reactively ensuring regulatory compliance but actively investing in intelligent ways to pursue aggressive sustainability targets. And as enterprises’ regulatory responsibilities increase in scale and complexity, their reliance on technology to help them manage sustainability initiatives is only going to increase.

“As a result of the European Supply Chain Act, many companies will be faced with the additional work of preparing the required documentation. But this challenge is also an opportunity. Companies should embrace this chance to make concrete improvements in process efficiency that enable them to achieve their sustainability goals more quickly and easily,” saidBauer.

How can process mining provide end-to-end supply chain visibility?

A supply chain is essentially a collection of processes combined into a mega-process, which means all the typical process challenges like inefficiency, fragmentation, miscommunication, silos, and opacity are multiplied.

The first step in remedying these issues and improving supply chain optimization is to achieve end-to-end visibility. With Celonis Process Intelligence as the connective tissue of your enterprise, you can use process mining to unlock full visibility at the micro and macro levels, finding value opportunities within individual processes, while simultaneously seeing holistically across processes to understand how a small change in one area will impact everything else.

For example, the Celonis Sustainable Spend Management App is purpose-built to help procurement teams “effectively allocate spend based on environmental, social and governance criteria.” Developed in collaboration with Ecovadis, a leading sustainability ratings platform, and IntegrityNext, a leading cloud based supply chain monitoring and ESG risk management system, the App enables people to:

• Review sustainable spend and supplier ratings across the supplier base
• Prioritize suppliers based on risk, rating coverage and specific ESG criteria
• Streamline actions to request and improve sustainability rating

Likewise, the Celonis Material Emissions App makes “it easier for customers to continuously measure, report and reduce Scope 3 emissions in procurement.” The App allows customers to:

• Accurately measure procured goods and services emissions
• Continuously track material emissions, take targeted action and progress towards environmental goals
• Assess opportunities to reduce Scope 3 emissions

Of all the areas that this end-to-end visibility benefits, supply chain sustainability happens to be one with extremely high (planetary-level) stakes and huge potential for optimization through Process Intelligence.

“Companies that use process mining already have far-reaching insights into their supply chain processes. They can now collect external supplier assessments and self-reported values (e.g. carbon footprint, human rights policies, etc.) and quickly and continuously integrate them into their procurement systems and incorporate them into the management of their processes. For example, the Celonis platform enables companies to take sustainability criteria such as the carbon footprint of raw products and goods or the production countries of suppliers into account as early as the ordering process. It is also possible to optimize logistics chains, not only in terms of costs, capacity utilization and speed, but also with regard to emissions. In addition, rule-based automation helps with the creation of reports across departmental boundaries,” said Bauer.