How CSDDD Will Transform Procurement

The Corporate Sustainability Due Diligence Directive (CSDDD) is a watershed moment for the European Union and its approach to human rights and the protection of the environment when it comes to global supply chains. Formally adopted in July 2024, the landscape-shifting legislation will transform how companies conduct their procurement and manage their supply chains.

The CSDDD brings with it mandatory human rights and environmental due diligence requirements for companies operating within the EU, both European and non-European. At its core, it is there to ensure businesses are working as part of sustainable development by identifying, preventing and mitigating adverse human rights and environmental impacts throughout their value chains.

It applies to companies that have more than a thousand employees and a worldwide turnover of US$450m in the last financial year.

For procurement professionals, the CSDDD brings with it a new era of responsibility and accountability. It requires organisations to undertake a risk-based approach to their due diligence, integrating these considerations into all the relevant policies and risk management systems. This means procurement will need to reassess their supplier selection, contracting and monitoring processes to align with the CSDDD's requirements.

It goes far beyond compliance, by mandating this new proactive approach to human rights and environmental issues will reshape the foundations of supplier relationships. This will make all those involved engage in more meaningful stakeholder dialogue, paving the way for a more robust complaint mechanism – ensuring their entire supply chain adheres to stringent sustainability standards.

To look deeper into CSDDD's impact on the industry, Procurement Magazine sat down with Levent Ergin, Global Chief ESG Sustainability Strategist & Global Head of ESG Strategic Alliance Partnerships at Informatica, a leading enterprise cloud data management company founded in 1993 and headquartered in Redwood City, California.

The company specialises in enterprise AI-powered cloud data management, providing the Intelligent Data Management Cloud (IDMC) platform. Informatica serves 85 of the Fortune 100 companies. The company processes approximately 97 trillion monthly cloud transactions and offers over 250 intelligent data services.

Recognised for its innovative approach, Informatica has been named a leader in multiple Gartner Magic Quadrant reports and continues to drive digital transformation through advanced data management and AI technologies.

"There's not a single vendor out there that can do this on their own, so that's why partnering is a critical part of our strategy," Levent says.

Effectively adopting CSDD 

Companies are mobilising their Scope 3 reporting as part of CSDDD, with many companies that we work with Informatica have got thousands of suppliers in their supply chain, and it's simply not feasible to reach out to every single one of them and ask a certain set of questions, and therefore companies need to leverage technologies and set up a new target operating model, which looks at people, process, technology.

“Traditionally we've had the blinkers on the E of ESG around carbon net zero, but it's not all about the E of ESG, it's about the three coming together, which then creates a sustainable company,” Levent says.

“Companies are gearing up to collect data from their supply chains, it's all about getting the foundations right.”

When companies work within a supply chain they are given a specific code, known as a standard industry classification code. That code outlines what the companies produce. They are then given a legal entity identifier, which identifies them as a company in that universe, in that geography. In today's complex landscape, it's really important to understand the company ownership structure as well as all the other carbon and ESG risks you're considering. So one of the first things being focused on is understanding the ownership structure of the supply chain.

Informactia is using tools from Dun and Bradstreet, who have millions of company records. Leveraging that data can understand who the ultimate beneficiary owner is, which could be a politically exposed person or even a sanctioned person, which companies are looking to avoid. So step one is getting the foundation right, understanding which legal entity you are doing business with.

The focus is shifting to include human rights and labour practices. “What the EU is saying is if your goods have been produced with child labour or forced labour, you will not be able to sell that product into the single EU market, which is brilliant in my opinion,” Levent adds.

Under these new rules, the company now holds the responsibility for finding all this information and making sure they are working within the guidelines.

Procurement: Implementing and overseeing CSDDD 

Levent believes there needs to be a golden thread of responsibility. From the CEO, to the boots on the ground, companies need to know who are the accountable people for each level of the organisation.

“We have a legal obligation to be lawful, and this is a piece of law that's coming around our supply chain,” Levent says.

"Then it becomes, who is the most knowledgeable person in our business to help us fix this? Then of course it's going to be either the Chief Procurement Officer or the supply chain officer, and then really then understanding, how do we set them up for success? What's the investment that we need to make as part of that transformation across people, process, technology? And that would be the way to go about fixing this properly."

Leveraging technology Forced labour remains a global concern, with various countries implementing initiatives to combat this issue. In the United States, for example, some public spaces like airport bathrooms display informational stickers with helpline numbers for potential victims. These efforts aim to provide support channels for those whose freedom has been restricted, such as through passport confiscation.

Technology plays a crucial role in consolidating data from disparate sources to gain insights into forced labour cases. ESG rating agencies actively monitor media and collect relevant information. As Levent notes: "Technology is that kind of silent watchdog that's always there monitoring these things."

Artificial intelligence (AI) is particularly valuable in analysing diverse data sources and linking them to supply chain entities.

The complexity of supply chains presents challenges in tracking the origins of goods. As Levent explains: "Typically there's a truck or a lorry that would go and visit these villages and collect goods from various farms." AI can help systematise this complex information, providing intelligence on various aspects of supply chain issues related to forced labour. This technological approach enables more effective monitoring and response to forced labour incidents globally.

How can procurement teams implement CSDD? 

A foundational data management platform is crucial for consolidating information from various sources, adds Levent. This allows companies to identify high-risk countries and industries more effectively. For instance, the chocolate and textile industries are known to have a higher occurrence of child labour.

While technology plays a crucial role, it's important to validate findings and address potential false positives. With boots on the ground validation of some of those things that could be false positives. Addressing child labour in supply chains requires a comprehensive strategy that combines data analysis, technology, and on-the-ground verification. By focusing on high-risk areas and leveraging available intelligence, companies can work towards more ethical and transparent supply chains.

"This is ultimately about transparency and the market has become much more conscious," Levent concludes.

"The consumers vote with their money, and consumers are a lot more sustainability conscious these days, and all of these regulations actually allow consumers to vote with their money in a system that's a lot more transparent and with the obligations that come with the regulatory reporting, which has to be audited.

"It then also creates trust and ultimately all of those things can only help companies to do the right thing because at the end of the day, a child is a child, whether it's in the UK or in a third world country, and everyone deserves to have the same level of human rights.

"This is ultimately about doing the right thing."

To read the full article in the magazine, click HERE.

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