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As the world’s largest trading bloc, the EU uses its considerablepurchasing power to meet its ambitious sustainability goals. In doing so, the EU’s new rules will reach well beyond its borders and will advance sustainability practices worldwide.
To level the playing field for domestic companies, a series of new policies aim to impose EU sustainability standards for non-EU companies that do business in Europe. These rules require companies to track and trace their value chains to assure that the practices meet EU norms.
Some have criticized the approach as EU protectionism or an attempt to regulate other markets. Sven Gentner, at DG Fisma, explained that the EU regulations are not about extraterritoriality: “Its intention is to ensure a level playing field within the EU.” Sven was referring to the Corporate Sustainability Reporting Directive (CSRD). But the same sentiment is true for the EU’s three major supply chain regulations:
The European Union Deforestation Regulations (EUDR)
The EUDR will take effect on December 30, 2024, requiring companies importing products linked to deforestation, such as coffee, cocoa, cattle, and wood, to conduct due diligence, requiring robust data collection and product traceability.
Products harvested after December 2020 must be deforestation-free and meet other strict social regulations. Non-compliance could result in hefty fines, product confiscation, and bans. Impacted industries, such as packaging, are struggling to meet the deadline. Siddharth Sehgal, at GlobalData, said, “The EUDR has significant implications for companies trading in the EU, and time is running out for packaging suppliers to plan and implement their compliance strategies.”
The Carbon Border Adjustment Mechanism (CBAM)
CBAM, currently in its first phase, requires EU companies that import covered goods, such as cement, iron and steel, aluminum, fertilizers, and others, to report the embodied carbon of those products. After 2026, importers will have to buy CBAM certificates based on a €/tonne of CO2 price of the cost of carbon on the EU’s Emissions Trading Scheme (ETS) that week.
Although some countries, like South Africa, claim the rule breaches the World Trade Organization (WTO) rules, Others, like Malaysia and India, are preparing their high-carbon sectors to start measuring and reducing emissions to stay competitive.
The Corporate Sustainability Due Diligence Directive (CS3D)
The CS3D requires EU and some non-EU companies to identify, assess, and mitigate social and environmental issues in their supply chains. Along with the other regulations, it poses significant challenges for non-EU companies supplying the EU market, with substantial penalties for non-compliance.
All of these new rules will represent a huge challenge for companies selling into the EU market. They will also result in increased costs and carry significant penalties for non-compliance, leading some to ask if the EU’s policies are too costly or if they are just setting best practices. Some companies have already begun to design their management systems to combine all of these requirements through their supply chains, and there are new tools on the market to automate the process. Like all compliance requirements, the costs will decline over time. For these trade-linked measures, we hope that the benefits to people and the planet continue to increase on a global scale.
Sustainability and trade have become a hot-button topic, with the US attempting to protect domestic clean technology manufacturing from cheaper Chinese products and the UK also releasing a carbon border tax. Expect trade-based sustainability measures and disputes to become more commonplace in the coming years.