The wave of sustainability-related regulatory changes in Europe may soon breach Indian coasts. The EU is among India’s key export markets after the United States.
India’s bilateral trade in goods with the EU reached USD 137.41 billion in 2023-24, with imports at USD 61.48 billion and exports at USD 75.93 billion. While EU is India’s largest trading partner for goods, bilateral trade in services, in 2023, also touched USD 51.45 billion, according to the Ministry of Commerce and Industry.
On April 24, 2024, the European Parliament gave a final green light to new rules obliging large firms to identify, prevent, detect and mitigate any negative impact on human rights and environment across their value chains. EU lawmakers backed the Corporate Sustainability Due Diligence Directive (CSDDD) by 374 votes to 235 against, with 19 abstentions.
And it entered into force on July 25, 2024, signalling a new era of corporate responsibility while promoting sustainability and ethical business practices.
While aiming to elevate global standards, the CSDDD pushes EU companies to establish and implement due diligence processes to ensure that their international suppliers comply with these standards to maintain business relationships. Those operating in the bloc are now required to check if their supply chains use forced labour or cause environmental damage and initiate action. It eyes a greener, more responsible future, establishing legal accountability for businesses concerning environmental and human rights transgressions.
CS3D & ITS OVERARCHING IMPACT
This distinct policy within the EU’s broader sustainability framework intersects its larger plans of promoting environmental sustainability and responsible business practices globally.
At the heart of these measures is the creation of transparency by regulating the supply chain of European companies. The due diligence objectives set obligations regarding their own operations and those carried out by their business chains which covers the upstream partners and suppliers and the downstream activities such as distribution and recycling.
They have to take care of the activities of their subsidiaries, and the business partners that set up their value chain – suppliers, manufacturers, sales partners, distributors, transporters, storage companies, contractors etc.
The goal is to push companies, both EU and non-EU, to act more sustainably.
The directive will apply to both EU and non-EU companies with major operations in the EU, with over Euro 450 million worldwide turnover. Though it does not apply to small and medium enterprise (SME), they have to align with this standard to be part of the value chain of a big company.
This is perhaps one of the most controversial issues because of the possible administrative burden that implementing this directive may place on companies, especially the smaller ones.
The CSDDD will start in phases over the next few years. Big companies with more than 5,000 employees must follow the rules by 2027. Companies with over 3,000 employees must comply by 2028, and those with over 1,000 by 2029.
DOUBLE WHAMMY
A day after the European parliament voted for the new law, India’s Commerce Ministry initiated an exercise to identify required infrastructure needs, potential sectors, and clusters which would help the country achieve the USD 1 trillion merchandise exports target by 2030. It was carried out to ensure India embraces sustainable practices to thrive globally as part of the value chain in the capacity of contractors and subcontractors. The EU is a key market for India and a bulk of exports include metals, textiles, chemicals, consumer electronics products, plastics and vehicles. One-fourth of India’s exports of iron, steel and aluminium are to the EU.
The CSDDD has come at a time when Indian companies are already grappling with the EU’s Carbon Border Adjustment Mechanism (CBAM) and the Deforestation Regulation with the former likely to impact nearly 43 per cent of India’s exports to the EU, worth USD 37 billion, according to a report by public policy think tank the Council on Energy, Environment and Water. The CBAM focuses on the carbon emissions associated with production of goods being imported to the EU, while CSDDD is part of its broader strategy to promote sustainable and responsible business practices globally, which could include aspects related to carbon emissions.
The CSDDD regulations require a lot of operational adjustments, resulting in increased price points for manufacturers, and small businesses may feel the heat due to possible rise in the compliance costs through their dealings with larger companies due to mandatory supply chain due diligence.
And non-compliance can even lead to termination of contract and legal action.
CRITICAL SECTORS
According to the India Review, India is emerging as a reliable alternate destination for manufacturers and supply-chain diversification due to its large labour and consumer base, low operating costs, and linkages to important international markets. Last year, India and the EU signed a Memorandum of Understanding on semiconductors that will help in building a “robust supply chain”.
The CSDDD, however, could lead to financial burden and loss of EU business for Indian firms if they are unable to meet the due diligence standards. There is also a danger of exclusion of Indian products from the EU market.
The Council on Energy, Environment and Water has highlighted that sustainability-focused EU regulations pose a risk to product categories such as textiles, chemicals, consumer electronics, plastics, and vehicles.
The adverse impacts, which CSDDD aims to mitigate, may range from child labour and slavery to pollution, environmental degradation, and biodiversity loss.
India’s textiles and clothing exports have remained resilient in the face of pandemic and geopolitical tensions and are set for growth in 2024, driven by rising export demand and stable cotton prices. The EU is a significant market for India, with Germany, France, and Spain notably contributing to the country’s global textile, apparel, and handicraft exports.
Garment industry in developing countries is characterised by precarious employment, low wages, excessive working hours and poor working conditions. With CSDDD in force, importing companies may now demand fair labour arrangements, due diligence of garment workers’ wages and other working conditions.
In 2022, one of India’s largest garment suppliers, which makes clothes for the UK high street, agreed to pay minimum wage and arrears to its 80,000 workers after a long legal struggle. It supplies the likes of fashion brands such as Nike, Zara, Tesco, C&A, Gap, Marks & Spencer and H&M. It is believed that ESG (environmental, social, and governance) compliance might have played its part in the company’s decision.
PVH, the parent company of Tommy Hilfiger and Calvin Klein, also faced labour charges for worker misconduct and made efforts to change their condition. This pressure from European and US brands for sustainability and ethical business practices is expected to increase in future.
FACING CHALLENGES HEAD-ON
Earlier this month, India reaffirmed its commitment to forging a balanced, ambitious, and mutually beneficial Free Trade Agreement (FTA) with the EU during an interaction with ambassadors from the European Commission delegation and member states. It stressed integrating India and the EU economies to unlock immense potential while securing the value chains.
However, Indian companies with significant business ties to the EU are likely to face increased audits and requests for compliance certifications related to environmental and human rights standards. The MSME suppliers may also not be in a position to submit all information to complete the due diligence process for possible human rights abuse, including the use of child labour, and environmental degradation.
Indian exporters run the risk of losing business if the importers are not satisfied with the response to the information that they seek.
Aligning business practices with CSDDD may also involve financial outlay for training, compliance, and possible restructuring of supply chains.
The way forward is unified guidelines to streamline compliance efforts, which could simplify the regulatory landscape for companies and enhance their ability to implement effective sustainability practices.
While India is considering carbon tax, especially for exports to European nations, a national emission trading system will also help enhance export competitiveness while encouraging industries to invest in technologies aimed at carbon reduction.
Adhering to these standards will give companies a competitive edge and help attract business from EU-based companies, seeking compliant and socially responsible partners.
India has to navigate the choppy waters of the new global order by looking at it as an opportunity to enhance competitiveness, attract global partners, making robust inroads into the global value chains, and contribute to a more sustainable and resilient future.
