CSDDD poised to create a trickle-down effect throughout the supply chain

The European Parliament’s recent adoption of the Corporate Sustainability Due Diligence Directive (CSDDD) has set a significant shift in corporate governance and responsibility in motion. The directive aims to ensure that companies take proactive measures to respect human rights and mitigate environmental impacts within their operations and supply chains.

With extensive global value chains, pharmaceutical and life sciences companies will be impacted by this legislation and will need to meet certain requirements.  Failure to do so could result in sanctions from national administrative authorities – including fines of up to 5% of their global turnover – which in turn could impact drug production capabilities and business viability.

The recent adoption of the Corporate Sustainability Due Diligence Directive (CSDDD) significantly impacts pharmaceutical companies, emphasizing enhanced corporate governance and environmental responsibility.

Assessing CSDDD’s Impact on Pharmaceutical Operations

Once approved by the Council of the European Union and implemented by Member States, large companies in the Pharmaceutical and Life sciences sector will be required to identify, prevent, mitigate or end and, where necessary, remedy human rights and environmental impacts across their global value chains. Companies will also need to create and implement a transition plan to ensure their business model is compatible with a 1.5-degree Celsius global warming scenario.

Companies that meet the directive’s thresholds, including those in the UK, and those who do business with them, will need to make significant changes. This will require a level of investment in human rights and environmental due diligence, and it would be wise for businesses to make preparation for this well before the directive’s enforcement, due to the scale of the requirements. CSDDD is designed to create a trickle-down effect by requiring large companies to conduct substantive due diligence on their subsidiaries, business partners and in their value chain.

Failure to comply with the directive can lead to civil liability and compensation claims if a company’s negligence or intentional misconduct causes damages to a natural or legal person. The directive requires companies to map their operations, subsidiaries, and business partners – a challenging task for pharma and life sciences businesses given the complexity of their global value chains. They will need to consider their entire proposition – from carbon emissions from production, shipping, and other activities, to how clinical trials are conducted.

So, what should businesses in the sector do now?

First, they will need to determine if they fall within the directive’s scope or if they’re part of a value chain that does. They should then conduct a human rights and environmental due diligence gap analysis risk assessment to identify salient issues and create a climate transition plan if this is not already developed.

A key principle enshrined in the CSDDD effective is engagement with affected stakeholders. It is through this engagement that actual and potential impacts can be identified; and then through further engagement appropriate steps to mitigate, end or remedy these impacts can be meaningfully identified. Given the centricity of people to the pharma and life sciences sector, organisations would be well advised to increase their capacity for effective stakeholder engagement.

For those in the supply chain of in-scope companies, an important first step is to  clearly map their carbon emissions,  as well as identify where the greatest risks lie for broader human and environmental impacts.

*This article was first published on Accountancy Age on 14 May 2024. Link to the article here: CSDDD Impact Pharmaceutical: Navigating New Compliance Challenges (accountancyage.com)