The ‘polluter pays’ principle is about to get a lot more complicated for EU companies — and they’re not ready

Confusion over the new EU Corporate Sustainability Due Diligence Directive is preventing companies from taking the necessary steps to ensure environmental standards are met inside and outside of Europe, says Jeff Sacre, Executive Director of CHWMEG.

Corporate environmental stewardship has never been more important. Consumers are savvy to greenwashing and putting their money where their mouth is: according to a 2022 IBM study, half of global consumers surveyed said they had paid an average of 59% more for sustainable or socially responsible products. Stakeholders, attentive to the trend, are putting pressure on companies to do the right thing. And now governments are, too.

The Corporate Sustainability Due Diligence Directive (CSDDD) making its way through the final stages of the EU’s legislative process will hold companies responsible for all adverse human rights and environmental impacts of their actions, not just for their own operations, but in their chain of activities inside – and outside – Europe.

The new rules will apply to three groups of companies: EU-based companies with 500 or more employees and at least €150 million global turnover; EU-based companies with 250 or more employees and at least €40 million global turnover operating in “high impact sectors,” namely, textiles, agriculture, metal product manufacturing, forestry, and mineral extraction, among others; and non-EU companies active in the EU with at least €150 million turnover within Europe.

These companies will now have to conduct mandatory audits of all vendors or suppliers involved in their “chain of activities” – meaning anything from product manufacturing to waste disposal – to ensure that environmental and human rights standards are being met every step of the way. If any direct or indirect supplier is found to have adversely impacted the environment, companies will be liable for clean-up costs, proportionate to their involvement at the facility. The Directive goes further than that. If an audit finds that any direct or indirect supplier is at risk of causing an adverse impact, companies will be required to step in and financially assist those deficient suppliers to reach the Directive’s requirements. Those financial contributions will also be proportionate to companies’ involvement at the facility.

In sum, companies will not only be liable for damages caused by vendors and facilities in Europe and throughout the world, but for preventing them too. The Directive is slated for adoption by the end of 2023. Companies will have two years to get in line with it.

While the Directive’s objectives are sound, the new diligence measures – namely, the mandatory audits – place a heavy burden on companies, which many are completely unprepared to shoulder. To get in line with the Directive, companies need a lot of help and guidance which, right now, they are not getting. Nowhere is this more apparent than in waste management.

In terms of sustainability, downstream waste management is arguably one of the most important and impactful parts of a company’s chain of activities. This includes everything from safely disposing hazardous chemicals to responsibly recycling cardboard boxes and other packaging materials. Waste and recycling management is a tentacular subset of most companies’ operations: large international companies can easily have upwards of 1,000 global waste and recycling vendors and facilities.

Although the “polluter pays” principle is enshrined in national laws all over the world, companies in the EU are often unaware of what actually happens to their waste or used materials once they leave their fence line.

Industrial waste management contracts in the EU are usually done through a brokerage system, meaning companies use a single vendor under a single contract at a fixed price to arrange the disposal or recycling of material waste. That broker vendor in turn shuttles each different kind of waste off to third parties to treat or dispose of them individually (or to transport them again to yet another vendor). 

The cheaper the outlet that vendor can find for each individual waste stream, the bigger its profit margins. This disincentivises broker vendors from seeking out pricier, better environmental options. And until some kind of headline-grabbing environmental disaster actually takes place, companies may be none the wiser about where their waste is going, and how it’s being handled. Case in point: an EU Commission study showed that only 30% of companies checked suppliers, including their waste handlers and brokers.

That’s exactly what the Directive wants to change. Companies will now have to figure out who each of their vendors are for each different kind of waste stream and monitor these facilities to make sure they are handling waste properly and adhering to human rights and environmental standards. This will require a gargantuan amount of planning. Many companies simply do not currently have the experience or resources to do this.

As a member trade association, we have seen a lot of confusion over the last few months, which is why we are raising the alarm. Several global organisations have told us that attorneys have given them conflicting opinions as to whether downstream waste management is even covered by the Directive. (The current draft explicitly covers waste from the company’s chain of activities.)

When we approached several waste treatment facilities in the EU, some were unaware of the Directive or of due diligence laws already existing in several countries. Companies and associations that are aware of the Directive have issued statements asking for practical guidance. And amid all this confusion, we have seen several companies offer services to provide supplier ratings as a cure-all, or issue certificates that vendors could tack on their wall to assure their customers that they are compliant with all standards and regulations. (The Directive clearly states that ratings and certification programs do not count as due diligence; companies            must conduct their own audits through third-party suppliers.)

Clearly, clarification, greater awareness, and guidance are all sorely needed. And not just for waste generators, but also for the facilities that may suddenly find themselves inundated with customers required to audit them, both in and out of Europe. To ease this complicated transition, they should know that there are existing tools at their disposal.

The CHWMEG organization and others like it, including the UK’s Waste Facilities Audit Association (WFAA) and the Western Canadian Auditing Roundtable (WCAR), have been conducting third-party audits of waste vendors and facilities for decades.

CHWMEG was borne on the heels of the passage of the United States’ 1980 CERCLA (“Superfund”) Law which, for the first time, held companies liable for downstream contamination. Unlike the EU Directive, the Superfund Law does not require companies to conduct audits of their US vendors and facilities. But companies started investigating their waste and recycling facilities anyway, and soon realized they kept running into each other at facilities while conducting their own audits, which were not only time consuming and expensive, but also frustrating and disruptive for the facilities. One facility reportedly hosted 250 customer audits in one year, meaning that every day of the week, it had anywhere between one and 15 people touring the facility. Companies realized that if they could agree on a protocol for gathering information, they could share a single report instead of elbowing each other at hundreds of locations around the US to gather the same information.

And that’s how CHWMEG got started. CHWMEG conducts reviews of waste and recycling facilities globally at the request of members, detailing the existing and potential future environmental risks associated with the facility’s environmental and human rights activities. Members pay a nominal annual fee and a fraction of the cost of producing each facility review report.

Ahead of the Directive’s adoption, companies should know that services offered by CHWMEG and others are available to immediately assist in addressing these new rules in a cost-efficient way. It is imperative that companies understand the scope of these new requirements and be prepared to comply. Only then will the Directive achieve its goal of fostering sustainable and responsible corporate behaviour.

Previous articleCompanies struggle to measure carbon-cutting across supply chains
Next articleNavigating greenhushing in 2023