A sustainable supply chain due diligence action plan for companies

Companies focusing only on compliance should take stock of these other drivers and implement actions accordingly. 

What is the current state of play in sustainability regulation? 

The ‘Omnibus I’ proposals, published on 26 February 2025, significantly water down sustainability-related reporting and due diligence requirements.

While delays to the implementation of sustainability due diligence and reporting rules affecting many in-scope companies have already been adopted by EU law makers, the EU institutions are currently examining whether to endorse more substantive reforms proposed by the European Commission.

In relation to the Corporate Sustainability Due Diligence Directive (CS3D), the proposals would limit due diligence requirements to direct business partners, would reduce the frequency of periodic assessments to every five years rather than annually, and would eliminate the civil liability regime. A special working group of the United Nations has warned that if these proposals are taken forward, the CS3D would no longer comply with the UN Guiding Principles on Business and Human Rights. 

The CS3D is considered the most ambitious regulation for sustainability due diligence globally, but it is not the only regulation. In the UK, the Modern Slavery Act requires companies to publish a statement on their policies and due diligence actions to combat modern slavery and human trafficking. The California Transparency in Supply Chains Act requires similar disclosures. The EU Conflict Minerals Regulation requires companies to conduct due diligence on certain high-risk minerals. Nonetheless, in general these regulations have a narrower scope than the CS3D. 

While sustainability due diligence regulation has taken a step back as a result of the Omnibus I proposals, companies seeking to pursue a minimum compliance approach to sustainability regulations could be ignoring more substantial risks. 

Legal risks are materialising in supply chains 

Companies can face significant legal risks if they fail to address sustainability issues within their supply chains. Innovative lawsuits and access to litigation funding are leading to legal liability for companies through their supply chain partners.  

In the past, legal risks tended to orient around human rights violations. In more recent years, lawsuits have been brought on environmental – and, specifically, on climate – grounds backed by well-funded and sophisticated NGOs with evidence driven by modern advancements in climate science. 

Implementing robust sustainability due diligence practices helps mitigate legal risks by identifying high risk supply chains, jurisdictions or business partners. Regular audits, risk assessments, and supplier training can mitigate legal risks and improve supplier engagement. Therefore, legal risk management is a critical aspect of sustainable supply chain management.  

Stakeholder expectations and reputational risks are escalating 

Long before companies were taken to court for human rights or environmental violations in their supply chains, sustainability incidents were litigated in the court of public opinion. Many companies suffered reputational damage because of the actions of suppliers. 

While controversies have always made front page news as consumers reacted negatively to bad press, increasingly consumers and other stakeholders such as investors or employees expect companies to uphold high sustainability standards. Consumers are more likely to support brands that demonstrate a commitment to ethical practices, while investors are integrating ESG criteria in their investment decisions. Studies have also shown that a company’s sustainability commitments impact job preferences, particularly among younger workers.

Meeting these expectations is crucial for maintaining stakeholder trust and loyalty. Companies that fail to prioritise sustainability risk losing their competitive edge and facing backlash from stakeholders. Engaging with stakeholders through transparent reporting and proactive communication can help build strong relationships and enhance corporate reputation. 

Sustainability doesn’t necessarily mean higher costs 

The initial reaction of most companies to sustainability measures is that they will increase supply costs. However, sustainable supply chain management offers numerous business benefits, including cost savings, operational efficiency, and resilience. Sustainable supply chains are also more resilient to disruptions, such as geopolitical events, or forced terminations as a result of sustainability controversies, which can improve business continuity. 

Sustainable supply chain management is a licence to do business 

In an environment of increasing legal and reputational risks, companies are scrutinising their suppliers more closely. Procurement decisions are no longer driven exclusively by price. as savings can easily be outweighed by additional costs elsewhere driven by these sustainability risks. As a result, sustainable supply chain management is a licence to do business, particularly when selling to companies in jurisdictions with higher regulatory or stakeholder expectations, such as Europe. 

Therefore, companies – particularly those in emerging markets – should understand what policies and measures need to be in place to sell to companies with supply chain sustainability requirements. 

Practical activities for sustainable supply chain management 

Companies can integrate sustainability into their existing supply chain management through a variety of practical activities. 

Supply chain mapping

Companies should identify and map their suppliers. Best practice is to extend this mapping to all direct and indirect suppliers, including lower-tier suppliers, to gain visibility across the entire supply chain. However, many companies will seek to prioritise supplier identification and mapping according to a risk assessment. The Omnibus I proposals also scale back the supply chain mapping requirement, giving way to a risk-based approach.

Risk assessment

Supply chain due diligence is about mitigating risks rather than seeking to eliminate all risks. Therefore, companies should conduct regular risk assessments to identify potential sustainability risks and prioritise areas for intervention. Certain supply chains are more prone to sustainability risks. Companies can use materiality frameworks like the Sustainability Accounting Standards Board (SASB) materiality map or expert opinion to guide them on industry-specific risks.

Implementing sustainability due diligence processes

Supplier evaluation and selection processes should include sustainability elements. Companies should develop and publish policies on responsible sourcing practices to guide procurement decisions. Companies may require suppliers to complete standard questionnaires addressing human rights and environmental risks, among other topics. These may cover suppliers at a corporate level or their business activities at certain manufacturing facilities or other assets. In addition, companies should seek to monitor their suppliers on an ongoing basis to keep due diligence up to date.

Supplier codes of conduct

Companies should consider developing and publishing supplier codes of conduct to establish expectations among their suppliers and demonstrate their commitment to sustainable supply chain management. Many industry bodies publish their own codes of conduct for members to accept or provide templates for their members.

Sustainability provisions in contracts

Companies can elevate voluntary commitments to mandatory requirements by contractualising their supplier code of conduct or inserting specific sustainability provisions into supply contracts, covering representations and warranties, data disclosure, and other sustainability-related obligations.

Sustainability data sharing

Data disclosure both helps companies to understand relevant risks in their supply chain and supports their regulatory reporting obligations, particularly under the Corporate Sustainability Reporting Directive (CSRD), which requires disclosure on a company’s entire value chain. By adopting standardised reporting frameworks, such as the Global Reporting Initiative (GRI) or the European Sustainability Reporting Standards (ESRS), companies can ensure transparent and consistent reporting. 

Supplier audits

Companies should consider adding a sustainability element to supplier audits to ensure their suppliers comply with sustainability requirements or standards and address any non-compliance issues.

Training and capacity building

Increasingly, companies are providing training and resources to suppliers to help them understand and meet sustainability requirements.

Collaboration and engagement

Finally, companies can engage with stakeholders, including suppliers, industry associations, and NGOs, to promote best practices and drive collective action. 

The role for legal

Legal advice is crucial for navigating different drivers of sustainable supply chain management. The evolving and increasingly diverging regulatory landscape across jurisdictions is a major headache for compliance teams looking for legal certainty. However, with the proposed roll back of certain sustainability due diligence requirements, regulatory compliance risk is decreasing, despite heightened uncertainty. 

To the contrary, legal risk may instead be increasing as other drivers come to the fore. Litigation risks, reputational risks and licence to do business risks must be informed by legal advice as companies seek to balance these risks with commercial considerations.  

Legal experts can help companies understand the legal considerations underpinning potential legal risks and develop compliance strategies to mitigate these various risks. Lawyers can also assist in drafting and reviewing contracts to include sustainability clauses and ensure that suppliers meet contractual requirements. 

While cases making their way through the courts today are obviously in respect of historical incidents and allegations, there is a long road ahead for sustainability litigation and engaging with legal advisers now may prevent future incidents or otherwise mitigate the risk of litigation occurring. Ensuring that sustainability practices are integrated into a company's overall risk management strategy is a cost-effective way to prevent legal risks crystalising.