The EU’s Corporate Sustainability Due Diligence Directive (CSDDD), effective from July 2024, mandates large companies to prevent and address human rights and environmental risks across global supply chains. While not directly targeting Indian firms, the directive indirectly impacts exporters, especially SMEs, who must align with stricter EU compliance standards.
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The Corporate Sustainability Due Diligence Directive (CSDDD or CS3D), formally adopted by the European Parliament in April 2024 and set to come into effect from July 2024, marks a significant milestone in the EU’s regulatory landscape.
As part of the broader European Green Deal initiatives, the Directive seeks to promote a fairer and more sustainable global economy by ensuring that large companies identify, prevent, mitigate, and account for adverse human rights and environmental impacts across their operations and supply chains. It aims to embed responsible business conduct into core corporate strategy—particularly through mandatory due diligence on labour rights, environmental harm, and governance practices—thus pushing the global business ecosystem toward greater accountability and transparency.
The Directive applies to large EU-based companies and non-EU companies operating within the EU that have over 1,000 employees and an annual global turnover exceeding €450 million. Although small and medium-sized enterprises (SMEs) are not directly covered, they will be affected indirectly as contractors and suppliers to these larger entities, especially in high-risk sectors.
By adopting a risk-based approach, the CSDDD allows companies to prioritise their due diligence efforts based on the severity and likelihood of negative impacts. It aligns with globally recognised frameworks like the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines, ensuring coherence with international standards. It also ties closely with corporate reporting obligations under the EU’s Corporate Sustainability Reporting Directive (CSRD), particularly through the concepts of double and impact materiality.
Scope of CS3D
At its core, the CSDDD covers both human rights and environmental obligations, drawing from internationally accepted conventions.
- Human Rights Focus: The Directive incorporates rights outlined in the UN and ILO conventions, such as prohibitions on child and forced labour, the right to life and liberty, just working conditions, freedom of association, and protection from discrimination. It also places special emphasis on the rights of children, including protection from economic and sexual exploitation and access to adequate living conditions.
- Environmental Safeguards: Companies must also avoid or minimise environmental degradation, such as soil and water pollution, biodiversity loss, excessive emissions, and illegal handling of waste or hazardous substances. It references key international environmental agreements such as the Basel, Stockholm, and Rotterdam Conventions, among others.
This comprehensive scope reinforces the EU’s commitment to human dignity, climate action, and ethical global trade, and reflects the goals of the EU Action Plan for Human Rights and Democracy 2020–2024, the EU Strategy on the Rights of the Child, and the EU’s Circular Economy Action Plan.
Implications for Indian companies
While the CSDDD is EU legislation, its ripple effects are global. Indian businesses—especially those exporting goods or services to the EU or involved in EU-linked supply chains—will come under increased scrutiny. They may be required to demonstrate robust sustainability practices and ensure compliance across their own supply networks.
Failure to align with the Directive could result in:
- Stricter Oversight: Indian exporters may face heightened audits, more detailed documentation requirements, and potential termination of contracts due to non-compliance.
- Rising Costs: Compliance will likely involve significant investment in due diligence systems, operational changes, staff training, and legal reviews.
- Legal and Reputational Risks: Non-compliance could expose businesses to fines, exclusion from EU markets, and long-term damage to brand reputation.
As Dr. Rajeev Verma, Assistant Professor at DU, notes: “CSDDD has increased the non-tariff cost of Indian SMEs who are even indirectly engaged with the EU. It affects the livelihood of workers, especially those in labour-intensive sectors. From the positive side, CSDDD may improve environmental and safety standards, working conditions, and visibility along supply chains linked with the EU. To enjoy competitive advantage, Indian firms should align with CSDDD as early as possible, which differentiates them in the global market and reduces the risk of supply chain disruptions. Large firms should focus on capacity-building programmes to help align with CSDDD.”
Indian SMEs, in particular, may find the transition challenging due to limited resources, but they play a critical role in global supply chains and will need to prepare accordingly. One of the most critical aspects of preparation will be establishing industry-wide coordination and institutional support. As Arpita Mukherjee, Professor at ICRIER, said: “Multi-stakeholder partnership should be built with trade bodies so that there is capacity building and training. The Directive requires EU companies to train and support MSMEs in their supply chains.”
To adapt to the evolving regulatory landscape under frameworks like the CSDDD, many SMEs will need to adopt digital tools that enhance traceability across their supply chains. Implementing systems such as inventory or supply chain management software can play a crucial role in helping businesses accurately track the origin of products, maintain comprehensive records of supplier data, and identify potential areas of risk. She also added, “It is important to implement farm-level traceability, document the environment and labour standards and work on the likely cost of adhering to the requirements of the Directive”.
For many SMEs, especially those with limited technical or financial resources, this transition may initially seem daunting. However, leveraging digital solutions can make the process more manageable and efficient. Features such as barcode scanning, real-time inventory tracking, automated alerts, and detailed reporting can significantly improve visibility throughout the supply chain. These capabilities enable businesses to proactively address issues, ensure data consistency, and demonstrate compliance with environmental and human rights standards.
To ensure Indian exporters move from being reactive to proactive, early strategic planning is crucial. As Dr. Baikunth Roy, Senior Assistant Professor of Economics at Patliputra University, emphasizes that: “Introducing clear and practical strategies at the outset—such as building capacity of small and medium enterprises (SMEs), implementing traceability technology in the supply chain, helps exporters demonstrate that their products meet the CSDDD’s human rights and environmental standards and collaborating with EU buyers for compliance, and using sustainability as a market advantage, will give Indian businesses the advantage to maintain their competitiveness in the European market.”
In essence, adopting such systems is not just about meeting regulatory requirements—it’s a strategic investment in long-term competitiveness and sustainability. By building stronger traceability mechanisms, SMEs can enhance trust with international buyers, reduce operational risks, and contribute meaningfully to responsible global trade practices.
