Corporate Sustainability Due Diligence Directive (CSDDD or the EU Supply Chain Law): A Comprehensive Analysis and Review of its Implications on Vietnam-based Companies

In recent years, the European Union has increasingly prioritized sustainability, recognizing its fundamental role in addressing global challenges. Various legislative frameworks have been put in place to integrate environmental, social, and governance (ESG) considerations into corporate strategies, including the Non-Financial Reporting Directive (NFRD), the Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy Regulation, the Corporate Sustainability Reporting Directive (CSRD) etc.
Recent developments have also seen individual EU Member States enact their own supply chain laws, varying in scope and legal consequences. Seeking to establish a common baseline across Member States, the European legislator aims to complement existing regulations with the Corporate Sustainability Due Diligence Directive (CSDDD), commonly referred to as the “EU Supply Chain Law”.
The directive, currently under discussion within the EU, aims to establish a comprehensive due diligence framework, requiring companies to identify, prevent, and mitigate adverse impacts on human rights, the environment, and good governance throughout their supply chains. The CSDDD is anticipated to cover a broad spectrum of entities, impacting various industries and sectors.
Despite the uncertainties surrounding its implementation, the CSDDD, if enacted, would impose substantial responsibilities on companies, including those operating in Vietnam, necessitating compliance with the directive’s provisions and engaging in effective due diligence practices. As the legislative landscape evolves, companies should remain vigilant and be prepared for potential changes to their sustainability and due diligence obligations.
CSDDD – Overview
The implementation of the directive is at risk of collapsing due to the concerns of several Member States, led by Germany, about the bureaucratic burdens involved and the potential impact on the competitiveness of European companies. The European Council vote, originally scheduled for 9 February 2024, then postponed to February 14 and finally held on 28 February 2024, failed. With this latest setback, it seems unlikely that the Directive will be adopted before the European Parliament elections in June 2024.
Scope (Addressees of Obligations)
If the directive comes into effect and is implemented by the Member States, the obligated entities would include companies, irrespective of their legal form and size, including SMEs and certain regulated financial undertakings outlined in the directive.
The obligations set out in the directive should apply to companies established under the laws of a Member State meeting the following criteria (“Category 1”):
• The company had, on average, more than 500 employees and a global net turnover of more than EUR 150 million in the last financial year for which annual financial statements have been prepared; or
• The company did not meet the above thresholds but had, on average, more than 250 employees and a global net turnover of more than EUR 40 million in the last financial year, with at least 50% of it generated in one or more of the following specific sectors:
o the manufacture of textiles, leather and related products (including footwear), and the wholesale trade of textiles, clothing and footwear;
o agriculture, forestry, fisheries (including aquaculture), the manufacture of food products, and the wholesale trade of agricultural raw materials, live animals, wood, food, and beverages;
o the extraction of mineral resources regardless from where they are extracted (including crude petroleum, natural gas, coal, lignite, metals and metal ores, as well as all other, non-metallic minerals and quarry products), the manufacture of basic metal products, other non-metallic mineral products and fabricated metal products (except machinery and equipment), and the wholesale trade of mineral resources, basic and intermediate mineral products (including metals and metal ores, construction materials, fuels, chemicals and other intermediate products).
In addition, obligations apply to companies established under the laws of a third country fulfilling one of the following conditions (“Category 2”):
• The company generated a net turnover in the EU of more than EUR 150 million in the financial year preceding the last financial year; or
• The company generated a net turnover in the EU of more than EUR 40 million but not more than EUR 150 million in the financial year preceding the last financial year, with at least 50% of its global net turnover generated in one or more of the above mentioned sectors.
Content – What Vietnam-based Companies Must Know?
Key Obligations
Companies are expected to fulfill their due diligence obligations through the following measures and exchange resources and information with their respective groups of companies and with other legal entities in accordance with applicable competition law:
• Integration of due diligence into their corporate policy, including an annually updated due diligence policy containing a description of the company’s approach (in the long term), a code of conduct (CoC) for employees and subsidiaries, and a description of related processes and measures taken to verify compliance with the CoC and to extend its application to established business relationships.
• Identification of actual or potential adverse human rights and environmental impacts arising from the company’s operations (or those of their subsidiaries and – where related to their value chains – from their established business relationships) through “appropriate measures.” For Category 2 companies, the obligation is limited to the relevant sector, while financial entities should identify impacts before providing the relevant service. In any case, companies shall, where relevant, also carry out consultations with potentially affected groups including workers and other relevant stakeholders to gather information on actual or potential adverse impacts.
• A tiered regulatory concept follows the identification, distinguishing between potential and actual adverse impacts:
o Potential adverse impacts should primarily be prevented and – if not (immediately) possible – adequately mitigated. This may include:
 the development of a “prevention action plan” with defined timelines and indicators for measuring improvement;
 obtaining contractual assurances from direct business partners within an established business relationship – and from their partners, to the extent that their activities are part of the company’s value chain (contractual cascading) – ensuring the compliance with the company’s CoC and and, as necessary, a prevention action plan;
 necessary investments;
 targeted and proportionate support for SMEs with which the company has an established business relationship, where compliance with the CoC or the prevention action plan would jeopardise their viability;
 collaboration with other entities compliant with Union law for the purpose of increasing the company’s ability to bring the adverse impact to an end, in particular where no other action is suitable or effective;
 efforts to conclude contracts with indirect partners accompanied by appropriate measures to verify compliance, in case the potential adverse impacts could not be prevented/mitigated by the measures listed above; to facilitate SMEs, the CSDDD stipulates that the terms used shall be fair, reasonable and non-discriminatory and costs of verification measures shall be borne by the company;
 If the measures stated above are ineffective, the company shall refrain from entering into new or extending existing relations with the partner in connection with or in the value chain of which the impact has arisen; the company shall – insofar as it is entitled to do so and there is reasonable expectation of a short-term-success – temporarily suspend connections with the partner in question or – in the event of severe impacts – terminate the business relationship. Financial entities shall not be obliged to terminate existing credit, loan, or financial service contracts when this can be reasonably expected to cause substantial prejudice to the entity to whom that service is being provided.

o Actual adverse impacts should be primarily brought to an end or – if not possible – minimized in their extent. This may involve:
 neutralizing/minimizing the extent of impacts, including through payment of damages /financial compensation to affected individuals/communities;
 developing and implementing a corrective action plan with reasonable and clearly defined timelines, if the adverse impact cannot be immediately brought to an end;
 obtaining contractual assurances from direct business partners within an established business relationship – and from their partners in case of contractual cascading – ensuring the compliance with the company’s CoC and, as necessary, a prevention action plan; to facilitate SMEs, the CSDDD stipulates that the terms used shall be fair, reasonable and non-discriminatory and costs of verification measures shall be borne by the company;
 If those measures are ineffective, the company shall refrain from establishing new relations or expanding existing ones with the partner causing the impacts. Financial entities shall not be obliged to terminate existing credit, loan, or financial service contracts when this can be reasonably expected to cause substantial prejudice to the entity to whom that service is being provided.
• Companies must also designate a legal or natural person established or domiciled in an EU Member State as an authorized representative to facilitate effective cooperation with the supervisory authority responsible for monitoring compliance obligations. Companies established in Vietnam will be subject to supervisory scrutiny, with the competent authority being that of the Member State in which the company has a branch. If the company has no branch in a Member State or has branches in different Member states, the authority of the Member State in which the company generated most of its Union net turnover in the financial year preceding the last financial year, preceding a certain date to be specified by the Member States or the time when the company first met the Category 2 criteria, whichever comes last, will be responsible. In the event of a significant change in circumstances, the company may request to change the competent supervisory authority.
Other Provisions
The directive includes the following additional provisions:
• Member States must establish and maintain a complaints procedure. Individuals and organizations with legitimate concerns about the actual or potential adverse impacts of a company’s operations, operations of its subsidiaries and value chains can submit complaints to the company, demand appropriate follow-up actions, and meet with company representatives for discussions. In the case of a well-founded complaint, the adverse impact that is the subject matter of the complaint is deemed to be identified.
• Monitoring the effectiveness of the company’s own operations and measures, those of their subsidiaries and, where related to the value chains of the company, those of their established business relationships regarding the identification, prevention, mitigation, bringing to an end and minimization of the extent of human rights and environmental adverse impacts; the assessments shall be carried out at least every 12 months and whenever there are reasonable grounds to believe that significant new risks regarding adverse impacts may arise. The company shall update its due diligence policy accordingly.
• Companies not subject to reporting requirements under the Accounting Directive (2013/34/EU) shall submit an annual statement on due diligence, potential and actual adverse impacts, and actions taken on those on their website in a language customary in the sphere of international business, by April 30 of each year. The EU Commission will further specify the content and criteria for reporting.
• Planned guidelines by the EU Commission will include model contract clauses and specific sectors or adverse impacts.
• Member States shall, furthermore, establish and operate websites, platforms, or portals to support companies and their partners as accompanying measures. The focus of this support, especially for SMEs, is emphasized, with Member States expected to financially support SMEs without prejudice to applicable State aid rules.
• Member States shall ensure that companies include emission reduction targets in their plans if climate change is or should have been identified as a principal risk for or impact of their business activities or should have been identified as such.
• Supervisory authorities should be able to initiate inspections – without prior warning to the company where this hinders the effectiveness of the inspection – on their own motion or upon substantiated concerns. Inspections may even be conducted in the territory of another Member State through mutual assistance. If a violation is found, the company shall be given an appropriate remedy period, and measures imposed by the supervisory authority do not preclude administrative sanctions or civil liability in case of damage. In this context, the supervisory authorities shall be empowered to order the cessation of infringements, the abstention from any repetition, impose pecuniary sanctions and adopt interim measures. Inversely, the directive aims to ensure the right of individuals to an effective judicial remedy against legally binding decisions by supervisory authorities concerning them.
• Natural and legal persons with objective grounds to believe that a company is violating national provisions adopted pursuant to the CSDDD shall be able to submit their substantiated concerns to any supervisory authority and be informed of the outcome of the examination and the supervisory decision. Access to national courts or other independent and impartial public bodies shall be granted to review the procedural and substantive legality of supervisory decisions, acts or failures to act.
• The reporting of breaches and the protection of reporting persons shall follow the Whistleblower Directive and the respective national implementation laws.
Member States shall enact rules on sanctions, complying with the European legislator’s directive for them to be “effective, proportionate, and dissuasive”. Efforts by the company to comply with any required remedial actions, any investments made, targeted support provided, as well as collaboration with other entities in mitigating adverse impacts within value chains should be duly taken into account. If financial sanctions are imposed, they shall also be based on the company’s turnover.
A legal novelty is the proposed civil liability for companies that fail to fulfill their obligations to prevent potential and remedy actual adverse impacts that could have been identified, avoided, mitigated, remedied, or minimized in their extend, resulting in damaging consequences. However, companies that have taken appropriate actions shall not be liable for damages caused by an adverse impact arising from activities of an indirect partner in the context of an established business relationship unless it was be unreasonable to expect that the actions taken regarding the adverse impacts are adequate. It should be noted that the company’s liability does not exclude that of its subsidiaries or direct/indirect business partners.
Implications of the Potential Implementation of the CSDDD on Vietnam-based Companies
In the event of the CSDDD coming into effect, EU companies falling under Category 1 will extend their due diligence obligations to their business partners, including those overseas. As a result, even companies based in Vietnam closely linked to the value chains of these EU entities, would be indirectly held accountable. However, the CSDDD does not limit itself to indirect effects but explicitly extends its scope to companies based in third countries. Thus, Vietnamese companies or companies with branches in Vietnam would be direct addressees of Category 2 obligations.
Moreover, the rules on sanctions to be adopted by Member States will also be (in-)directly relevant for Vietnamese companies.
Therefore, investment in and adoption of sustainable technologies and practices, coupled with legal advice on appropriate strategies, will be critical in this context and for risk mitigation. Going forward, it will also be essential to comply with regulatory guidelines issued by the supervisory authorities.
Our firm is ready to assist and guide you in these matters and to help you develop appropriate strategies.
Nevertheless, Vietnamese companies are unlikely to be caught completely off guard by these commitments. Given their existing commitments under the EVFTA, encompassing CSR and environmental standards, climate protocols and biodiversity protection, they are not entirely unprepared. Chapter 13 of the EVFTA integrates sustainable development as a fundamental component of the bilateral trade relations with the EU. In light of the EVFTA commitments, Vietnam is striving to ensure and promote a high level of environmental, labor and social protection through its legislation and policies, and is constantly seeking to improve. Regarding procedural guarantees, unlike other topics discussed within the EVFTA framework, any dispute arising from Chapter 13 relating to trade and sustainable development, including labor, is not subject to the general dispute settlement procedures under Chapter 15. Discussion on labor issues can only be settled through government-to-government consultations or panel of expert as stipulated under Chapter 13.
In terms of labor standards, the EVFTA does not create any new standards, but emphasises the implementation of commitments that Vietnam and the EU made to as members of the ILO and it’s Declaration on Fundamental Principles and Rights at Work, and its follow-up, specifically: i) the freedom of association and the effective recognition of the right to collective bargaining, ii) the elimination of all forms of forced or compulsory labor, iii) the effective abolition of child labor; and iv) the elimination of discrimination in respect of employment and occupation. Prior to the entry into force of the EVFTA, Vietnam had already adopted and adjusted its laws, regulations, and policies to be in line with internationally recognized labor standards. This process continues as Vietnam fulfils its obligations under both the CPTPP and the EVFTA, notably the amended Labor Code in 2019.
In terms of environment protection, in addition to Chapter 13, the EVFTA also contains a dedicated chapter on Non-tariff Barriers to Trade and Investment in Renewable Energy Generation. It covers specific rules for the renewable energy sector (i) on non-discriminatory treatment in general (licensing and authorization procedures), (ii) on local content in particular, and further (iii) on the use of international standards.
Relevant recent initiatives include Decision No. 876/QD-TTg, Decision No. 500/QD-TTg on the issuance of the Power Development Plan VIII, Law No. 72/2020/QH14 on Environmental Protection, and the “One Strategic Framework for Sustainable Development Cooperation between the Government of the Socialist Republic of Vietnam and the United Nations for the Period 2022-2026”, among others. These necessarily imply a number of obligations for companies operating in Vietnam to adhere to these standards and local requirements.
The CSDDD sets out obligations for companies concerning actual and potential adverse impacts on human rights and the environment related to their own activities, those of their subsidiaries, and their partners in the value chain with whom they maintain established business relationships. These obligations, potentially to be implemented by the Member States, also extend to companies operating in Vietnam with business activities directly or indirectly linked to the EU. At present, however, the chances of the CSDDD being enacted seem uncertain.
Please do not hesitate to contact Dr. Oliver Massmann under if you have any questions on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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