New Kiel Study on Firm Impact of Due Diligence EU Legislation

A new study “The cumulative effect of due diligence EU legislation on SMEs” requested by the INTA Committee from the European Parliament from the KCG researchers, Aoife Hanley, Finn Ole Semrau, and Frauke Steglich, jointly with Rainer Thiele (Kiel Institute) is now published. The study addresses the expected impact of the EU’s Corporate Sustainable Due Diligence Directive (CS3D) on small and medium-sized enterprises (SMEs). It takes the German supply chain act (Lieferkettengesetz) as an example that may hold lessons for EU due diligence legislation. Against the background of a review of the existing literature on the impact of sustainability regulations, the authors conducted expert interviews with German business associations, German foreign chambers of commerce in emerging economies, as well as German supporting agencies. The objective was to identify key challenges SMEs in the EU and third countries face when dealing with the requirements of the supply chain act, and to discuss support measures that SMEs need or are already using. The interview replies must be interpreted against the background that the law is still relatively new and no experience is yet available. Nevertheless, they provide insights that can be helpful in the current negotiations for the EU CS3D.

Their interviews with German stakeholders, conducted in May and June 2023, corroborate that due diligence regulations present both opportunities and challenges for SMEs. The supply chain act, for instance, presents opportunities for companies to expand their customer base by catering to the growing demand for sustainable and ethically sourced products. Companies that comply with the supply chain act may also enjoy indirect benefits, such as gaining access to public procurement.

Uncertainty regarding the legal requirements of the German supply chain act is seen as the most important obstacle. For many companies, it is not clear what they are obliged to do to be regarded as compliant. Another issue that was frequently raised in the interviews is the pass through of costs of compliance from larger buyer companies to smaller suppliers, which is regarded as a considerable burden by the SMEs. Interviewees also recurrently demanded a simplified framework for reporting, which aim to eliminate duplications and redundancies, ensuring that businesses are not subject to unnecessary reporting obligations. So far, termination of business relationships in response to due diligence requirements is perceived as unlikely, but the risk is expected to increase. SME suppliers in developing countries often completely lack awareness of the supply chain act and related planned regulations at the EU-level. They, therefore, face insurmountable hurdles in complying with due diligence regulations without further support.

Based on the results of this analysis and evidence from related legislations, the authors provide recommendations as to how the EU can help ease the burden for SMEs when implementing the proposed CS3D. These include, amongst others, targeted capacity-building measures for SME suppliers in developing countries, who mostly know little about European due diligence legislation, and simplifications in the reporting requirements for SMEs in Europe.

The full study “Hanley, A., Semrau, F.O., Steglich, F. and Thiele, R. (2023), The cumulative effect of due diligence EU legislation on SMEs, PE 702.597, Sep. 2023, INTA Committee, European Parliament, European Union” can be accessed here.

Contacts:

Finn Ole Semrau (finn-ole.semrau@ifw-kiel.de; +49(0)431-8814-646)

Frauke Steglich (frauke.steglich@ifw-kiel.de; +49(0)431-8814-360)