Latest EU sustainability regulations in brief

Background

In April 2024, the European Parliament has formally approved three new regulations that will most likely also impact Vietnamese manufacturers. These regulations are a part of the European Union’s drive towards sustainable growth and higher adherence to social and environmental standards in the European market and global supply chains. The enforcement of these regulations is expected to take place in stages, starting 2026. A brief overview of these regulations is given below.

Corporate Sustainability Due Diligence Directive (CSDDD)

Large companies operating in the EU market will be required to identify, prevent, and mitigate risks deriving from their business activity on social or environmental issues, and compensate for negative impacts – both, in their own operations and along their supply chains. In comparison to national legislations, such as the German Supply Chain Due Diligence Act, the EU regulation is more comprehensive in terms of its thematic scope (includes more environmental and climate issues), coverage of the supply chain (entire supply chain, not only direct suppliers) and higher sanctions for non-compliance. It also allows affected parties outside the EU to sue a company for damages stemming from violations in front of a European court. What is also new is not only companies registered in the EU are in scope, but also non-EU companies with a minimum net turnover of EUR 450 million/year. CSDDD has been approved by the European Council and all member states will have to pass corresponding national legislation, meaning existing national Due Diligence laws would be “overruled”.

Eco-design for Sustainable Product Regulation (ESPR)

The ESPR establishes a framework to set eco-design requirements for specific product groups to significantly improve their circularity, energy performance and other environmental sustainability aspects. Under the ESPR, specifications for most product groups will be developed, setting standards on a range of characteristics, including recycled content, carbon and environmental footprint, substances used in the product, durability, reusability, upgradability, and reparability, or energy and resource efficiency. The specifications on the requirements for each product group will be defined by the European Commission earliest in the second half of 2025.

With the ESPR, the European Union aims to make products that are more circular and produced with less environmental impact the default on the market. In addition, the ESPR will require products sold in the EU market to have a “Digital Product Passport” to provide information about its environmental sustainability.

Forced Labour Prevention Regulation

This regulation bans all products made with forced labour at any point in the supply chain from the EU market (including online sales). Forced labour is defined in line with International Labour Organisation (ILO) definitions. The regulation complements the supply chain monitoring obligations for companies set under the CSDDD. It exceeds insofar as all types and sizes of companies and industries are in scope and the enforcement authorities may ban individual products from being placed, sold to, or exported from the EU market at the expense of the economic operator.

Expected implications for Vietnamese manufacturers

As Viet Nam is further integrating into global supply chains, with a large number of companies supplying for multinational enterprises or directly exporting to the European market, the recently approved regulations can affect Vietnamese companies in the following aspects.

Supplier consideration: Buyers will increasingly consider the adherence to social and environmental standards in the selection of their suppliers. Sustainability will become even more of a competitiveness factor.

Data and transparency: (European) buyers will request more information on a range of sustainability issues from their business partners, like environmental performance of the supplier, including GHG emissions, adherence to international labour standards (focus on ILO core conventions), type and origin or material used in production, or supply chain partners.

Shared responsibility: Regulations like the CSDDD emphasize the responsibility of buyers to take an active role in the mitigation of risks in their supply chain. Buyers cannot simply “outsource” obligations to suppliers; they need to actively share responsibility with business partners in identifying and preventing violations of sustainability standards themselves, ask cooperation of suppliers to take remedial action, and have supportive measures in these regards.

Product design: New products going to the EU market will have to follow more stringent sustainability requirements and demand significant consideration and modification from producers. Some of the specifications will require manufacturers to innovate on products, processes, and business models.

Monitoring and complaint mechanisms: Checks on labour adherence in form of audits or (third party) inspections will likely increase. Suppliers will also be increasingly requested to set up an effective company-internal complaint mechanisms and ensure protection of those utilizing the procedure.

How can manufacturers prepare?

• Get familiar with due diligence obligations and eco-design requirements. Consider additional training for your staff on new requirements and procedures.
• Set up internal data management systems to maintain proper documentation of processes, procedures, and production data to provide necessary information for possible audits. Analyse the data and define measures to continuously improve your performance.
• Analyse existing and potential risks within your own business operations and supply chains and take appropriate measures to reduce, cease or mitigate these risks.
• Engage in a dialogue with your customers on future expectations and communicate the need for support to meet their requirements.
• Seek support from external entities such as the Responsible Business Helpdesk (RBH) at VCCI, or suitable service providers.