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 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. If enacted as expected, the CSDDD would impose substantial responsibilities on companies, including those operating in Vietnam and linked to the EU, 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.
Below, you will find an overview of the relevant provisions of the CSDDD for companies based in Vietnam.
CSDDD – Overview
Status
After extensive discussions behind closed doors and multiple delays in the European Council’s vote, on 15 March 2023 the majority of EU member states have agreed on a draft overall compromise package of the CSDDD, paving the way for its adoption by the European Parliament. Parliamentary approval is expected to follow suit. As a next step, should the Parliament adopt its position at first reading in accordance with the compromise package, the European Council would approve the Parliament’s position, resulting in the adoption of the act in the wording corresponding to the Parliament’s position.
Achieving this breakthrough, however, required several significant changes to the original Draft Directive. While the concept of corporate civil liability as set out in the Draft Directive remains intact, the scope of the Directive has been narrowed, significantly reducing the number of companies affected, including companies in Vietnam. This was reached by raising the employee and turnover thresholds for companies, and by removing the original list of “specific sectors” (e.g. textile and leather production, agriculture, forestry and fisheries, and extractive industries) that were considered to have an inherently higher risk of human rights violations, potentially affecting companies with smaller staff and turnover. Additionally, a new aspect compared to the previous Draft is the introduction of a tiered approach, establishing transition periods ranging from three to five years based on the number of employees and global turnover for companies concerning CSDDD provisions.
Scope
General Scope
As a compromise solution, the Directive has been delineated with a flexible scope of application. It provides that it will only apply to companies meeting the specified conditions in two consecutive financial years. Conversely, the Directive will cease to apply to companies if the conditions outlined in the Directive are not met for each of the last two relevant financial years.
Addressees of Obligations
If the Directive – as set forth in the compromise package – 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”):
(i) the company had, on average, more than 1000 employees and had a net worldwide turnover of more than EUR 450 million in the last financial year for which annual financial statements have been or should have been adopted;
(ii) the company did not meet the above thresholds but is the ultimate parent company of a group that reaches the thresholds in the last financial year for which consolidated annual financial statements have been or should have been adopted; or
(iii) the company entered into or is the ultimate parent company of a group that entered into franchising or licensing agreements in the Union in return for royalties with independent third-party companies, where these agreements ensure a common identity, a common business concept and the application of uniform business methods, and where these royalties amount to more than EUR 22,5 million in the last financial year for which annual financial statements have been or should have been adopted, and provided that the company had or is the ultimate parent company of a group that had a net worldwide turnover of more than EUR 80 million in the last financial year for which annual financial statements have been or should have been adopted.
In addition, obligations apply to companies established under the laws of a third country fulfilling one of the following conditions (“Category 2”):
(i) the company generated a net turnover of more than EUR 450 million in the Union in the financial year preceding the last financial year;
(ii) the company did not reach the above thresholds but is the ultimate parent company of a group that on a consolidated basis reaches the thresholds in the financial year preceding the last financial year; or
(iii) the company entered into or is the ultimate parent company of a group that entered into franchising or licensing agreements in the Union in return for royalties with independent third-party companies, where these agreements ensure a common identity, a common business concept and the application of uniform business methods, and where these royalties amount to more than EUR 22,5 million in the Union in the financial year preceding the last financial year; and provided that the company generated or is the ultimate parent company of a group that generated a net turnover of more than EUR 80 million in the Union in the financial year preceding the last financial year.
Exemptions
It is remarkable that the amended version of the Draft CSDDD significantly restricts its scope, as it now includes a provision for exemptions. Namely, if the primary activity of the ultimate parent company is holding shares in operational subsidiaries and it does not engage in making management, operational, or financial decisions affecting the group or any of its subsidiaries, it may be exempted from fulfilling the obligations under the Directive. However, this exemption is contingent upon one of the ultimate parent company’s subsidiaries, established in the Union, being designated to fulfill the CSDDD obligations on behalf of the ultimate parent company, including its obligations regarding its subsidiaries’ activities. In such instances, the designated subsidiary is granted the necessary means and legal authority to effectively fulfill these obligations, particularly in ensuring it receives relevant information and documents from the group’s companies to meet the ultimate parent company’s obligations under the CSDDD. The ultimate parent company must seek this exemption from the competent supervisory authority. If the above-mentioned conditions are met, the competent supervisory authority will grant the exemption. Nevertheless, the ultimate parent company remains jointly liable with the designated subsidiary for any failure of the latter to comply with its obligations.
Additionally, determining whether a company falls under the CSDDD is intended to be subject to ongoing assessment: Where a company has met the Category 1 or 2 criteria, the Directive shall only apply if this occurs in two consecutive financial years. Conversely, the Directive shall no longer apply to a company where the conditions laid down in the relevant Category cease to be met for each of the last two relevant financial years.
Temporal Scope of the Provisions
Moreover, the transposition periods for the CSDDD provisions vary depending on the size and formation of the companies. For companies falling under Category 1 (i) and (ii) with more than 5000 employees and a net worldwide turnover of over EUR 1500 million, the Directive will apply three years after its entry into force. Similarly, for companies meeting the same criteria but with more than 3000 employees and a net worldwide turnover of more than EUR 900 million, the Directive will apply four years after its entry into force. Companies falling under Category 2 (i) and (ii) with a net turnover exceeding EUR 1500 million in the Union, will be covered by the Directive three years after its entry into force, while those with a net turnover exceeding EUR 900 million fall under it four years after. All other companies in both Categories will be subject to the Directive five years after its entry into force. However, the measures necessary to comply with reporting obligations under the CSDDD will be applied to these companies starting on from January 1, 2028 or January 1, 2029.
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 risk-based human rights and environmental due diligence into all their relevant policies and risk management systems, developed in prior consultation with the company’s employees and their representatives, and including an annually (or promptly following significant changes) updated due diligence policy containing a description of the company’s (long term) approach, a code of conduct (CoC) for employees, subsidiaries and (in)direct business partners, and a description of processes and measures taken to integrate and implement due diligence and to verify compliance with the CoC and to extend its application to business relationships.
· Identification and assessment 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 chains of activities – from their business partners) through “appropriate measures.” In essence, companies are required to (a) map their own operations, their subsidiaries’, and, if applicable, their business partners’ operations in order to pinpoint areas prone to adverse impacts; (b) carry out an in-depth assessment of these operations based on the mapping results. Furthermore, if essential information for the in-depth assessment can be obtained from business partners at different levels of the chain of activities, companies should prioritize requesting it directly from partners operating in areas most susceptible to adverse impacts.
If it’s not possible for companies to address all identified adverse impacts simultaneously and to their fullest extent, companies shall prioritize addressing of identified adverse impacts when fulfilling their obligation to prevent, mitigate, bring them to an end or minimize them. Prioritization should be determined based on the severity and likelihood of adverse impacts. Once the most severe and likely adverse impacts are addressed within a reasonable timeframe, companies shall then address less severe and likely adverse impacts.
A tiered regulatory concept follows the identification, distinguishing between potential and actual adverse impacts:
· Potential adverse impacts shall primarily be prevented and – if not (immediately) possible – adequately mitigated. To determine the appropriate measures companies have to take in this regard, consideration must be given to (a) whether the potential adverse impact stems solely from the company, jointly from the company and its subsidiary or business partner, or solely from the company’s business partner in the chain of activities; (b) whether the potential adverse impact may arise in the operations of the subsidiary, direct business partner, or indirect business partner; (c) the company’s ability to influence the business partner responsible for or contributing to the potential adverse impact.
Depending on the latter, the appropriate measures may include:
o the development without undue delay of a “prevention action plan” (in cooperation with industry or multi-stakeholder initiatives) adapted to company’s operations and chain of activities and containing defined timelines and indicators to measure improvement;
o establishing contractual assurances from direct business partners – and from their partners, to the extent that their activities are part of the company’s chain of activities – ensuring the compliance with the company’s CoC and and, as necessary, a prevention action plan;
o necessary financial or non-financial investments, adjustments or upgrades, such as into facilities, production or other operational processes and infrastructures;
o necessary modifications of, or improvements to, the company’s own business plan, overall strategies and operations, including purchasing practices, design and distribution practices;
o targeted and proportionate support for an SME which is a company’s business partner, as needed considering the SME’s resources, expertise, and limitations. This may involve providing or facilitating access to capacity-building, training, or upgrading management systems. If compliance with the CoC or the prevention action plan would jeopardize the SME’s viability, the company shall provide targeted and proportionate financial support, such as direct financing, low-interest loans, guarantees for continued sourcing, or assistance in securing financing;
o collaboration with other entities compliant with Union law for the purpose of increasing the company’s ability to prevent or mitigate the adverse impact, in particular where no other measure is suitable or effective;
· Actual adverse impacts should be primarily brought to an end or – if not immediately possible – minimized in their extent. Again, this should be based on appropriate measures to be determined according to the above-mentioned criteria regarding potential adverse effects. Such appropriate measures may include:
o neutralizing/minimizing the extent of impacts through actions appropriate to the severity of the adverse impact and to the company’s implication in the adverse impact;
o developing and implementing a “corrective action plan” without undue delay (in cooperation with industry or multi-stakeholder initiatives) adapted to the company’s operations and chain of activities and containing defined timelines and indicators to measure improvement, if the adverse impact cannot be immediately brought to an end;
o establishing contractual assurances from direct business partners – and from their partners, to the extent that their activities are part of the company’s chain of activities – ensuring the compliance with the company’s CoC and, as necessary, a correction action plan;
o making necessary financial or non-financial investments, adjustments or upgrades, such as into facilities, production or other operational processes and infrastructures;
o making necessary modifications of, or improvements to, the company’s own business plan, overall strategies and operations, including purchasing practices, design and distribution practices;
o providing targeted and proportionate support for an SME which is a company’s business partner, as needed considering the SME’s resources, expertise, and limitations. This may involve providing or facilitating access to capacity-building, training, or upgrading management systems. If compliance with the CoC or the prevention action plan would jeopardize the SME’s viability, the company shall provide targeted and proportionate financial support, such as direct financing, low-interest loans, guarantees for continued sourcing, or assistance in securing financing;
o collaborating with other entities compliant with Union law for the purpose of increasing the company’s ability to bring to an end or minimize the extent of such impact, in particular where no other measure is suitable or effective;
o providing remediation when the company is responsible for or contributes to an actual adverse impact. In cases where the adverse impact solely stems from the company’s business partner, the company may choose to offer voluntary remediation or utilize its influence over the partner to facilitate remediation.
Companies may, where relevant, implement additional measures beyond those outlined above. These may include engaging with business partners regarding expectations for preventing and mitigating potential adverse impacts or bringing actual adverse impacts to an end or minimize the extent of such impacts, as well as providing or facilitating access to capacity-building, guidance, administrative and financial support such as loans or financing, while considering the resources, knowledge, and constraints of the business partner.
In case the adverse impacts could not be prevented/adequately mitigated/brought to an end/minimized by the measures listed above, companies may seek contractual assurances with indirect business partners (including SMEs) accompanied by appropriate measures to verify compliance (e.g. independent third-party verification, including through industry or multi-stakeholder initiatives). To lighten the burden on SMEs, the CSDDD stipulates that the terms used shall be fair, reasonable and non-discriminatory, and costs of verification measures – if considered as necessary upon assessment – shall be borne by the company; In case the SME requests to pay at least a part of the cost, or in agreement with the company, it shall be able to share the results of verifications with other companies.
If the measures stated above are ineffective, the company shall – as a last resort – refrain from entering into new or extending existing relations with the business partner in connection with or in the chain of activities of which the impact has arisen; If permitted by law and after assessing whether the impacts of suspension or termination would outweigh those of the adverse impact, the company must then: (a) adopt and implement an enhanced prevention/corrective action plan without undue delay, by using or increasing the company’s leverage through the temporary suspension of business relationships with respect to the activities concerned, including a specific and appropriate timeline for actions, during which the company may seek alternative business partners; (b) terminate the relationship if there is no reasonable expectation that the efforts would succeed or the implementation of the plan fails to prevent/mitigate the adverse impacts. In this regard, Member States shall ensure that contracts allow for suspension or termination, except where mandated by law. The company shall prevent/mitigate/bring to an end the impacts of suspension/termination, provide notice to the business partner, and review its decision regularly. If the company opts not to suspend/terminate, it must monitor and reassess potential impacts and appropriate measures available periodically.
· 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.
· Member States must ensure that parent companies covered by the CSDDD and meeting certain conditions set out in it can fulfill the obligations outlined there on behalf of their subsidiaries under the Directive’s scope, provided it ensures effective compliance. However, this doesn’t affect subsidiaries’ supervision or their civil liability.
Other Relevant Provisions
The directive includes the following additional provisions the application of which must be ensured by Member States:
· Companies shall effectively engage with stakeholders, providing relevant information and allowing stakeholders to request additional information if needed. Stakeholder consultation should occur at various stages of the due diligence process; however, if effective engagement with stakeholders is not reasonably possible, companies shall consult additionally with experts who can provide credible insights into potential or actual adverse impacts. Companies must identify and address barriers to engagement, ensuring participants are protected from retaliation and retribution, including by maintaining confidentiality or anonymity. Companies shall also be allowed to fulfill these obligations through industry or multi-stakeholder initiatives; the latter, however, shall not replace consultation with employees and their representatives, which must comply with relevant EU and national legislation.
· Companies shall establish and maintain a “fair, publicly available, accessible, predictable and transparent” complaints procedure, in which companies shall take reasonably available measures to prevent any form of retaliation by ensuring the confidentiality of the identity of the person or organization submitting the complaint. Individuals and organizations (and their representatives) with legitimate concerns about the actual or potential adverse impacts of a company’s operations, operations of its subsidiaries or business partners in the company’s chain of activities can submit complaints to the company, demand appropriate follow-up actions, meet with company representatives for discussions, and shall be provided with the reasoning as to whether a complaint has been considered founded or unfounded. In the case of a well-founded complaint, they are to be provided with information on the steps and actions taken or to be taken, the adverse impact that is the subject matter of the complaint is deemed to be identified, and the company shall take appropriate measures.
Furthermore, companies shall establish an accessible mechanism for individuals and organizations to submit notifications regarding actual or potential adverse impacts related to their operations, subsidiaries, and business partners in their chains of activities. Notifications can be made anonymously or confidentially as per national law, and companies must prevent retaliation by maintaining the confidentiality of the notifier’s identity. Additionally, companies may inform notifiers about actions taken or planned. Companies shall also be allowed to fulfill these obligations through collaborative complaints’ procedures and notification mechanisms, provided they meet specified requirements. Submitting a notification or complaint does not affect access to other procedures or mechanisms.
· Companies shall assess the implementation and monitor the adequacy and effectiveness of their own operations and measures, those of their subsidiaries and, where related to the their chains of activities, those of their business partners regarding the identification, prevention, mitigation, bringing to an end and minimization of the extent of adverse impacts; the assessments shall be carried out without undue delay after a significant change occurs, but 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, the identified adverse impacts and the derived appropriate measures accordingly.
· Companies not subject to reporting requirements under the Accounting Directive (2013/34/EU) shall report on matters covered by the CSDDD by publishing an annual statement on their website. The statement must be published in at least one official language of the EU Member State of the supervisory authority designated pursuant to the CSDDD and, where different, in a language common in the sphere of international business. It should be published within 12 months after the financial year’s balance sheet date or, for companies voluntarily reporting under the Accounting Directive, by the annual financial statements’ publication date. Companies formed under third-country legislation – thus, also companies established under Vietnamese law – must include information about their authorized representative. By March 31, 2027, the Commission will adopt delegated acts specifying detailed reporting content and criteria, aligning them with sustainability reporting standards under the Accounting Directive and ensuring no duplication with reporting requirements for companies subject to the Disclosure Regulation (EU) 2019/2088.
From January 1, 2029, companies shall, when publishing their annual statement, simultaneously submit it to a collection body specified in the CSDDD. The purpose is to make the statement accessible on the European Single Access Point (ESAP) established under Regulation (EU) 2023/2859. Member States shall also ensure that the submitted information meets certain requirements: it must be in a data-extractable format as defined in Regulation (EU) 2023/2859 or, if required by Union or national law, in a machine-readable format. Metadata accompanying the information should include the company’s names, legal entity identifier, company size, industry sector, type of information, and an indication of whether personal data is included. Furthermore, Member States shall ensure companies obtain a legal entity identifier and, by December 31, 2028, designate at least one collection body and notify ESMA thereof, to make the information accessible on ESAP. The European Commission is empowered to adopt implementing measures to specify additional metadata, data structuring, and the required machine-readable format for information submission.
· Planned guidelines, including general guidelines and for specific sectors or specific adverse impacts, by the EU Commission will include model contract clauses.
· Member States shall, furthermore, establish dedicated websites, platforms, or portals to provide information and support to companies, their business partners, and stakeholders. These platforms should particularly cater to SMEs involved in companies’ chains of activities and provide access to reporting criteria, Commission’s guidance, a single helpdesk (through which companies may seek information, guidance and support about how to fulfil their obligations), and information for stakeholders on how to engage throughout the due diligence process. Member States may financially support SMEs and stakeholders, and the Commission may supplement these measures, including through joint stakeholder initiatives. Companies can participate in industry initiatives and use third-party verification to support due diligence obligations, ensuring independence and accountability. Guidance will be issued by the Commission to assess the suitability of such initiatives and verifiers.
· Companies shall adopt and implement a transition plan for climate change mitigation, aligning with the goals of the Paris Agreement and EU regulations. The plan must be updated annually, detailing progress towards time-bound targets and should include decarbonization strategies, investment details, and roles of administrative bodies. Companies already reporting a transition plan under relevant EU directives are considered compliant.
· Supervisory authorities shall be equipped with adequate powers and resources to enforce obligations outlined in the CSDDD, including to request information and conduct investigations. 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. If non-compliance is identified, companies are given a chance to remedy the situation; however, measures imposed by the supervisory authority do not preclude administrative sanctions or civil liability in case of damage. In this context, supervisory authorities shall also have powers to order cessation of infringements, impose penalties, and take interim measures. These powers can be exercised directly, in cooperation with other authorities, or through judicial application. Inversely, individuals shall have the right to effective judicial remedies against decisions made by supervisory authorities. Supervisory authorities are required to keep records of investigations and enforcement actions. Decisions made by supervisory authorities regarding compliance do not affect a company’s civil liability.
· 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 Protection Directive (EU) 2019/1937 and the respective national implementation laws.
· Adherence to the obligations outlined in the CSDDD, whether through mandatory adoption or voluntary measures, shall be considered an environmental or social factor that contracting authorities can take into consideration when awarding public and concession contracts, as per Directives 2014/24/EU, 2014/25/EU, and 2014/23/EU.
Penalties and Liability
Member States shall establish and enforce penalties for violations of national provisions under the CSDDD, ensuring that they are “effective, proportionate, and dissuasive”. Penalties must consider the nature and severity of the infringement, previous violations, remedial actions taken, and financial benefits or losses from the infringement etc. Pecuniary penalties shall be based on the company’s net worldwide turnover, with a maximum limit of not less than 5% of the turnover in the preceding financial year. Decisions containing penalties must be published, publicly available for at least 5 years, and shared with the European Network of Supervisory Authorities (ENSA), excluding personal data.
Member States shall also ensure that companies can be held liable for damages caused by intentional or negligent failure to comply with the CSDDD obligations regarding the prevention of potential and bringing to an end of actual adverse impacts, provided that the right, prohibition or obligation listed in Annex I (“Rights And Prohibitions Included In International Human Rights Instruments”) is aimed to protect the natural or legal person, and the violation harms a natural or legal person protected under national law. This liability constitutes a legal novelty and entails the obligation for full compensation. It also extends to companies that have participated in industry initiatives or used third-party verification.
Nevertheless, a company can’t be held liable if damage is solely caused by its business partners. If the company is held liable, the affected party has the right to full compensation under national law without leading to overcompensation. Member States shall, furthermore, ensure reasonable limitation periods (at least 5 years) for bringing actions for damages and accessible legal proceedings which shall not begin to run before the infringement has ceased and the claimant knows or can reasonably be expected to know of the behavior, the caused harm and the identity of the infringer. Claimants shall also be allowed to seek injunctive measures and authorize relevant organizations to bring actions on behalf of injured parties. It should also be noted that national courts can order disclosure of evidence as necessary for claims, and companies involved in initiatives or third-party verification can still be held liable. In addition, the liability of a company for damages doesn’t affect the liability of its subsidiaries or business partners. The civil liability rules in the CSDDD don’t limit companies’ liability under other legal systems and may be enforced even if the applicable law isn’t that of a Member State.
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 chains of activities 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. In this regard, the ENSA shall publish an indicative list of third country companies subject to the CSDDD. This is particularly relevant for Vietnam-based companies, as it will provide clarity on which entities fall under the scope of the Directive. However, it is important that the criteria for the opening of the scope of the Directive are regularly reviewed. The start of the application of the regulations, particularly for Category 2 companies, but also for Category 1 companies, as this may indirectly affect companies in Vietnam, must be also taken into account.
Moreover, the rules on penalties 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 and the European Commission.
Our firm is ready to assist and guide you in these matters and to help you develop appropriate strategies.
CSDDD and EVFTA
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 on approving the Action Program for Transition to Green Energy and Mitigation of Carbon Dioxide and Methane Emissions from Transportation, 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.
Conclusion
In essence, with the expected EU Supply Chain Directive on the horizon, companies based in Vietnam must remain vigilant.
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 business partners. Its current compromise-based wording suggests that the Directive will soon come into effect. Therefore, affected companies in Vietnam need to prepare for the future legal landscape as early as possible to remain competitive in the EU market. By proactively adapting to the evolving legal framework, Vietnamese businesses can effectively navigate these challenges and sustain their foothold in Europe.