European companies insufficiently prepared for new supply chain regulations

Companies in Europe are currently preparing for the phased implementation of the Corporate Sustainability Due Diligence Directive (CSDDD). However, new research among 400 European companies, conducted by EQS Group and the University of Applied Sciences Ansbach, shows “critical gaps” in supply chain transparency and resources needed to comply with the new directive. As the main obstacles, respondents cite a lack of supply chain visibility and labour.

With the CSDDD coming into force in 2027, EU-based and international companies with a revenue of €1,500 million or more in the EU need to start preparing to proactively manage human rights and environmental risks in their supply chains. 86% of respondents have already started familiarizing themselves with the CSDDD, even though the final details of the directive had not yet been published at the time of the survey.

According to the surveyed companies – from Germany, Switzerland, France, Spain, Denmark and the UK – a severe shortage of labour and financial resources is currently the biggest challenge regarding the directive. In addition, they cite documenting and reporting requirements as well as a lack of supply chain visibility as the main problems. However, only 30% of companies plan to allocate additional resources such as budget, staff or IT tools to tackle these problems.

Rising risk levels in deeper layers of the supply chain

While companies are confident in their ability to manage risks within their direct operations – 84% report low risk – the risk level continues to increase in the deeper layers of the supply chain. At indirect suppliers, 55% of respondents rate the risk of human rights and environmental violations as high or very high, while 41% rate the risk as medium.

‘The deeper you go into the value chain, the more complex the risks become,’ says researcher Professor Dr Stefanie Fehr of Ansbach University. ‘This poses major challenges for companies seeking to comply with the new regulations and requires a proactive, risk-based approach.’

94% of organizations have established whistleblowing policies in accordance with the EU Whistleblowing Directive or national whistleblowing legislation. Since the introduction of these policies, 73% have received no reports of human rights or environmental violations. If reports were received, they were mostly anonymous, so they could not be assigned to a specific group of people such as employees or other affected parties.

Growing integration of ESG into risk management

Despite limited resources, companies are prioritizing ESG issues in their supply chain strategies, recognizing that human rights and environmental protection increasingly define their relationships with suppliers, business practices and risk management. 68% have integrated human rights and environmental issues into their risk management processes and ensure that these criteria are taken into account when selecting suppliers.

‘The complexity of global supply chains offers not only challenges, but also significant opportunities to build a more sustainable infrastructure,’ states Achim Weick, founder and CEO of EQS Group. ‘The CSDDD and the German Lieferkettengesetz offer companies the opportunity to not only meet legal requirements, but also to strengthen trust among business partners and customers. By investing in transparency and responsibility now, companies can gain a lasting competitive advantage. To take full advantage of this, further investment in technological solutions will be crucial to compensate for labour shortages.’

German companies struggle with compliance

In addition to their dealings with the CSDDD, the survey also asked how German organizations are dealing with compliance with the Lieferkettengesetz. That supply chain law has been in force in Germany since 2023. Many German organizations still face major challenges in complying with it, with 89% citing a lack of staff as the biggest obstacle. Despite this, 87% have implemented risk management systems, although 58% still use Microsoft Excel and only 34% use specialized software.

As with the CSDDD, most companies rate the risk of violations of the Lieferkettengesetz as low within their own operations and among direct suppliers. However, the risk increases significantly among indirect suppliers, with only 27% reporting a low risk at that level. Moreover, 46% of companies have already received complaints related to this law. Despite these challenges, 52% see the Lieferkettengesetz as an opportunity to strengthen values and responsibility in their supply chain. 30% also believe the law will help them secure contracts, and 28% foresee a positive impact on their reputation.