Authored by Anahita Panda, 3rd Year Student at Hidayatullah National Law University, Raipur
INTRODUCTION
The Supply Chain Due Diligence Act, 2021 (“LkSG”) enacted on January 1, 2023, in Germany, addresses critical legal gaps in corporate accountability by mandating human rights and environmental due diligence across supply chains. The legislation marks an important advancement by requiring businesses with at least 1,000 employees to apply starting on January 1, 2024. As a result, approximately 2,900 companies based in Germany, along with multiple foreign companies operating through German branches, must implement comprehensive due diligence systems throughout their supply networks under the LkSG.
The complexity of the global supply chains consists of several tiers of suppliers covering multiple jurisdictions which has historically resulted in certain accountability gaps in corporate responsibility. However, now sweeping reforms and legislation are being led by European nations to change this scenario. These rules represent the camisado – the shift from voluntary corporate social responsibility to obligatory human rights due diligence, providing corporate responsibility with a legal basis to inspect their supply chains and fix identified human rights violations such as environmental damage.
This change, like corporate liability, is significant. In the past companies were only liable for their direct actions. European Union Corporate Sustainability Due Diligence Directive (“CSDDD”) frameworks, companies are now legally held accountable for their entire value chain, encompassing all entities involved in production, from raw material suppliers to workers assembling and distributing goods. Compliance requires enhanced oversight, robust monitoring systems, rigorous risk assessments, and functional grievance mechanisms. These obligations fundamentally transform corporate operations and supplier management, compelling businesses to institutionalize ethical due diligence across every tier of their supply networks.
LEGISLATIVE FRAMEWORK
The evolving global landscape of supply chain due diligence legislation has prompted European lawmakers to establish stringent due diligence laws, reflecting broader shifts in corporate accountability standards worldwide. The trend was initiated by France, with the Duty of Vigilance Law, 2017 (“Loi de Vigilance”) which pioneered corporate accountability by requiring large French companies to identify and address human rights and environmental impacts throughout their supply chains, including vigilance plans with risk mapping and monitoring systems. The evolution continued with Germany’s LkSG and culminated in the European Union’s CSDDD, adopted in May 2024 with Member States required to transpose it into national law by July 2026. This global shift is further evidenced by parallel developments such as Norwegian Transparency Act, 2021 and Switzerland’s counterproposal to the Responsible Business Initiative.
The CSDDD represents the apex of this evolutionary process, aligning due diligence requirements across member states while extending human rights and the environment to include good governance practices. The directive applies extraterritorially, covering European Union (“EU”) firms with more than 1,000 workers and €450 million+ global net turnover (≈6,000 enterprises), and significantly non-EU firms generating at least €450 million in net turnover in the EU (≈900 companies). This extraterritorial reach means companies worldwide must comply with EU standards to access European markets, effectively globalising due diligence requirements and creating compliance obligations that extend far beyond European borders. While SMEs are exempted from direct obligations, they remain eligible for support when indirectly impacted as business partners in value chains.
The building block of this evolution is the German legislation LkSG, which mandates companies to investigate whether human rights violations and environmental degradation may occur in their supply chain, extending liability beyond direct suppliers to indirect suppliers when risks are identified. The LkSG creates binding legal obligations rather than merely directory guidance, requiring companies to create systems to manage risk in the supply chain, carry out risk analyses routinely, and put in place preventative measures. The notable point of the law is that it requires companies to document their efforts in compliance and release annual reports on their due diligence.
CORPORATE OBLIGATIONS AND IMPLEMENTATION CHALLENGES
As supply chain due diligence laws spread, businesses are changing their operations and their strategies – this is being carried out on a larger scale than earlier. Companies are no longer free to operate in a bubble; under regulations such as Germany’s Supply Chain Due Diligence Act (LkSG), they must act as guardians of human rights and environmental protection through their entire supply networks. This will require systems that actively seek out unsafe working conditions, child labor, or deforestation – not just among direct suppliers, but deep into the layers of subcontractors and sources of raw materials to comply with regulations. They are also required to assign teams, conduct annual risk assessments, and solve problems where they arise.
However, compliance mandates meticulous documentation, with details published in annual reports and retained on company websites for seven years under German law. While this transparency represents a significant milestone for advocacy groups, it simultaneously introduces legal and reputational risks for businesses.
A critical challenge in transnational law arises when a foreign supplier’s obligation to engage in extraterritorial due diligence conflicts with that supplier’s host country labour or environmental regulation. For example, European companies operating in countries with weaker ecological standards may face legal differences when required to introduce EU imposed due diligence that goes beyond the local regulations. Thus, leading to complicated compliance situations in which multinational companies must navigate conflicting legal requirements and meet the highest standard in their global operations.
The challenges, however, are steep. Identifying risks across multi-tier supply chains is one of the most daunting challenges businesses face under new due diligence laws. A 2022 EY Report on ‘How sustainable supply chains are driving business transformation’ underscores this struggle, revealing that companies often hit roadblocks when collecting sustainability data from suppliers due to inconsistent metrics or unreliable reporting. For instance, while one supplier might track carbon emissions rigorously, another may use vague or outdated methods, creating a patchwork of unusable data.
Thus, effective monitoring of environmental or social compliance is almost impossible, which is critical as required by laws like Germany’s LkSG. A fashion brand verifying ethical cotton sourcing risks exposure if supplier records lack proof of sustainable water use or fair labor. The result? Irrespective of their intention to follow the rules, the inability to track deep-tier risks in the scale system will lead companies to shut down, damaging their reputation and it will bring them to a standstill, merely delaying progress.
The LkSG must not be misinterpreted as a paper tiger. Garment workers recently filed the first formal complaint under LkSG with the Federal Office of Economic Affairs (“BAFA”), alleging Amazon and IKEA failed to monitor unsafe factory conditions in Bangladesh despite their legal obligations. This case highlights the LkSG’s global reach in enforcing corporate accountability for human rights risks, particularly for companies refusing to adopt established safety frameworks like International Accord. Under the LkSG, companies with annual revenues exceeding €400 million face fines upto 2% of global turnover, while penalties surpassing €175,000 disqualify them from public procurement contracts for three years. For multinationals, compliance transcends financial penalties; it safeguards access to critical projects and public trust. Failing to address mounting ethical deficits risks legal liabilities and irreversible reputational harm.
Some compliance cost crush hits hard. Building extensive systems for tracking, auditing suppliers, and publishing reports requires heavy investment in technology, staff and supplier collaboration. For mid-sized firms navigating these regulatory burdens, the financial challenge transcends substantial costs and represents an insurmountable hurdle, forcing difficult trade-offs between regulatory adherence and sustaining core business functions.
IMPACT ON INTERNATIONAL BUSINESS OPERATIONS
The latest supply chain due diligence regulations are reshaping how international companies operate their business structure. The establishment of new laws restructures how corporations handle governance alongside their suppliers and risks across global business sectors.
The European Commission estimates that complying. Its proposed Corporate Sustainability Due Diligence Directive (“CSDDD”) will cost EU companies €220 million upfront and €760 million annually. Adding the European Sustainability Reporting Standards (ESRS), part of the Corporate Sustainability Directive (CSRD), approximately 50,000 EU companies – up from 11,000 under prior rules – must now adhere to the European Sustainability Reporting Standards (ESRS). As per the impact assessment conducted by the European Commission, the expected cost for EU businesses to comply with the CSRD is estimated to be between €3.6 billion and €8.8 billion over a ten-year period, which includes costs associated with collecting and verifying sustainability data, improving internal systems, and involving stakeholders in sustainability discussions.
Modern supply chain governance is undergoing a paradigm shift, moving away from transactional, arms-length interactions toward collaborative partnerships grounded in transparency and mutual capacity building. Corporations like H&M, Unilever, and Siemens exemplify this transition, adopting supplier codes of conduct that extend beyond contractual obligations to include training programs, joint sustainability initiatives, and third-party verification systems. These measures aim to align suppliers with corporate ESG goals while addressing systematic risks such as labor violations or environmental harm.
Contemporary risk management frameworks have transformed substantially, with organizations adopting advanced technologies like blockchain to enhance supply chain transparency. Walmart and Maersk, for instance, employ blockchain for real-time monitoring of sustainability compliance, creating immutable records that enable proactive risk identification and audit-ready reporting.
These operational changes across multinational corporations are creating a de facto harmonization of business conduct across jurisdictions, as companies standardize their due diligence practices globally to meet the highest regulatory standards, potentially generating customary international norms in corporate responsibility over time.
Simultaneously, robust due diligence frameworks are increasingly viewed as strategic differentiators. Companies excelling in compliance not only avoid penalties but also gain consumers’ trust, particularly among ethics-driven markets. This shift illustrates how regulatory mandates can spur innovation, turning compliance into a catalyst for competitive advantage and brand equity.
FUTURE IMPLICATIONS AND RECOMMENDATIONS
Supply chain due diligence laws are converging globally, and the nature of the way companies do business overseas is being reimagined. The UN’s Guiding Principles on Business and Human Rights ask companies to respect human rights and act diligently. But change moves glacially now. Just 34% of the world’s largest companies have transparent systems for employee training or assigning responsibility for human rights issues, the 2023 Corporate Human Rights Benchmark finds. While 61% of companies have some form of human rights due diligence process, just 27% engage with rightsholders in those processes. The gap raises fundamental questions about the quality of such initiatives. Authentic engagement with rightsholders – the people most impacted by corporate – activities is essential, as it empowers communities, builds trust, and increases a company’s ability to detect and respond to human rights issues before they become major concerns.
Europe is currently at the forefront of turning voluntary practices into requirements. France’s 2017 Duty of vigilance Law established the precedent, which was subsequently adopted by LkSG and Norwegian Transparency Act, 2021 and the EU’s 2024 Corporate Sustainability Due Diligence Directive. These legislations mandate companies to identify, prevent, and remediate human rights and environmental malpractices in their value chains – supported by fines and litigation risks.
Judicial enforcement of France’s Duty of Vigilance Law is intensifying. In 2021, NGOs sued TotalEnergies in the Paris Civil Court under France’s Duty of Vigilance Law, alleging its risk plan omitted human rights and environmental risk in its East African oil ventures. Though dismissed on procedural grounds in 2023, the case reflects courts’ willingness to scrutinize due diligence. This pioneering litigation demonstrates the ways in which courts can specify “adequate” compliance, notably parents’ companies’ liability for subsidiaries and suppliers. For multinationals, the law’s extraterritorial application renders legal risks concrete operational imperatives.
The supply chain benefits from digital innovations like blockchain, AI, and IoT (Internet of Things), enhancing transparency. These technologies, endorsed by the World Economic Forum (2024), enable tracking products from origin to retail. Demonstrating the benefits of digitalization, reducing waste, environmental impact, and costs. Businesses must adopt these tools to shift from compliance to building stakeholders’ trust through strategic transparency.
Critically, digitization is not just about compliance – it introduces efficiency. Through the removal of waste from inventories, carbon footprint minimization, and the automation of audits, these technologies lower costs while advancing sustainability goals. For businesses, adopting such technologies is no longer an option; it’s the move from regulatory survival to competitive success in an age of transparency.
Based on these trends, companies should consider the following recommendations:
- To meet evolving due diligence requirements, businesses must introduce ethical practices into core business. Industry leaders like Patagonia and Nestle are pioneering human rights and environmental safeguards through initiatives such as regenerative agriculture partnerships and farmer training programs, embedding these principles into procurement, supplier agreements, and performance metrics to reduce legal risks while strengthening consumer trust. Companies can transform compliance from an administrative task into a strategic market advantage. This proactive approach not only reduces legal exposure but also fosters consumer trust, driving sustained performance and loyalty.
- Business must adopt cooperation to spur supply chain due diligence, tapping industry coalitions such as the Responsible Business Alliance (RBA) for electronics or the Fair Labour Association (FLA) for apparel. These coalitions facilitate collaborative audits, shared training efforts, and common standards – minimizing cost while maximizing impact. For instance, RBA members share costs to audit high-risk factories while FLA affiliates jointly set wage standards. Such cooperation not only simplifies compliance obligations but also elevates industry-wide practice, forestalling a “race to the bottom”. By focusing on collective action instead of individual effort, companies can better tackle systematic problems such as forced labour or eco-degradation, turning regulatory headaches into sector-wide gains.
- To survive tighter regulation without emptying the coffers, firms need to bet on technologies that map supply chains like never before. Take AI-powered tracking systems or blockchain platforms that follow materials from mines to store shelves – technologies that turn murky supplier networks into transparent, auditable channels. Such systems can do more than safeguard against compliance; they save costs by detecting risks early and avoiding costly recalls or penalties. Businesses like Ford and Philips already use such technology to automate audits and give regulators real-time data. For Businesses, the message is clear: visibility tools are not nice to have add-ons – they’re the new foundation of ethical, effective operations.
CONCLUSION
Global supply chain laws like LkSG,2023, France’s Duty of Vigilance,2017, and the EU’s sweeping directive have raised the bar on corporate accountability. The transition from self-initiated CSR legal requirements forces businesses to demonstrate their achievement of abuse elimination in their supply networks.
Compliance with these obligations undeniably entails significant complexities. Charting murky supplier chains, fighting patchy data, and navigating compliance costs strain even the most seasoned companies. But innovators are discovering silver linings. By embedding due diligence in procurement, partnering with industry peers, or leveraging blockchain traceability, companies transcend compliance to unlock operational efficiencies, earn consumer trust, and ensure long term viability.
In this era, supply chain due diligence is no longer a cost center but a critical driver of competitive advantage. Companies that embed it strategically will not merely comply with regulations but leverage compliance to achieve operational efficiency, stakeholders’ trust, and long-term resilience.
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