Save your tiers for another day

The European Commission’s Omnibus I package includes two far-reaching changes to the Corporate Sustainability Due Diligence Directive that risk rendering the EU’s supply chain law completely ineffective in practice. The first amendment proposes to limit the due diligence duty of companies covered by the law to direct (‘Tier 1’) suppliers only. This restriction implies that companies will only need to map and subsequently address the risks of human rights abuse or environmental harm at their direct suppliers, rather than throughout their entire supply chains. Companies will only be required to assess and address harms occurring with ‘indirect business partners’ further up the supply chain if they are in possession of ‘plausible information’ about such adverse impacts. 

The second amendment restricts the due diligence process even further by severely limiting the amount of information a company covered by the CSDDD can obtain from suppliers with fewer than 500 employees. The Omnibus proposal states that, in principle, companies covered by the CSDDD will only be able to request information from their suppliers that is included in the EFRAG Voluntary Reporting Standard for non-listed small and medium-sized enterprises(opens in new window) (the ‘VSME standard’).

These changes were among the top priorities of business groups, such as Business Europe, the American Chamber of Commerce, BDI, and Medef, which lobbied(opens in new window) the European Commission to weaken the CSDDD. Both amendments undermine the international framework for responsible business conduct and due diligence, which has been in place since 2011 (the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Responsible Business Conduct).

Why Tier 1 does not work: the case of supermarket supply chains 

The supermarket sector provides a prime example of why the proposed value chain scope restrictions are so harmful to the effectiveness of the CSDDD. Given their enormous purchasing volumes and strong price-setting power, supermarket chains play a crucial role(opens in new window) in preventing and mitigating the human rights violations and environmental impacts that are common to many agri-food supply chains. Under the CSDDD, large supermarket chains would be required to conduct a mapping of potential and actual human rights violations and environmental harms in their supply chains. Following this mapping, they should focus their efforts on preventing and mitigating the most severe adverse impacts. In recent years, some EU supermarkets have already started(opens in new window) applying the due diligence principles.

In this article, SOMO analyses the 6,758 direct suppliers of store brand food products that were published by seven major European supermarket chains, including Lidl, Aldi Nord, Aldi South, Jumbo, and Albert Heijn. These supermarkets were selected because they are the only ones in the EU that publish comprehensive supplier lists or maps. Lidl(opens in new window) (€125.5 billion in revenue in 2023), Aldi Nord(opens in new window) (€28.6 billion), and Aldi South(opens in new window) (€83 billion) are among the largest supermarket chains in Europe, and together operate in all EU countries. These supermarket chains generate most of their revenues from store-brand products. In the Netherlands, supermarkets(opens in new window) generate over half of their total revenues (€50.9 billion in 2023) through store brand products.

The analysis shows that the vast majority of the seven supermarkets’ Tier 1 suppliers are located in countries classified as having low governance and human rights risks. Five out of the seven supermarkets hardly source from Tier 1 suppliers in countries experiencing elevated risks of human rights violations, with less than three per cent of their suppliers. Albert Heijn and Jumbo list higher numbers of suppliers in high-risk countries, but informed SOMO that their public supplier maps also include some Tier 2 suppliers. Responding to questions from SOMO, Albert Heijn stated that 14.2 per cent of its Tier 1 suppliers are located in risk-countries.

These figures highlight the absurdity of the Tier 1 restriction, given that a large share of supermarket supply chains originate in sectors and countries with high risks of human rights violations and environmental issues(opens in new window) . Examples of such products include bananas, avocados, coffee, tea, chocolate, meat, fish, nuts, and wine – and the list goes on. Although negative impacts also occur at Tier 1 suppliers and in low-risk countries (e.g. at meat processing facilities in the EU), generally, the most severe impacts of supermarket supply chains are found in the upper tiers. These impacts include, among many others, deforestation and land rights violations(opens in new window) in meat and soy supply chains, child labour(opens in new window) in cocoa supply chains, and exploitation of farm workers in wine supply chains. The Tier 1 restriction proposed in the Omnibus package implies that, in principle, supermarkets do not need to identify or seek to address these abuses in their supply chains.

The CSDDD will not cover most supermarket suppliers

Proponents of the Tier 1 limitation may argue that if the Tier 1 suppliers of supermarkets, such as traders, packagers, or food product manufacturers, conduct due diligence as well, they will identify and address adverse impacts in higher tiers in their supply chains. However, based on SOMO’s CSDDD Datahub and Moody’s Orbis, an estimated nine per cent of the seven supermarkets’ suppliers will be covered by the CSDDD, making it highly unlikely that such a ‘cascaded’ due diligence approach would work in practice. 

Omnibus will restrict crucial information flows on human rights violations

The severe limitations the Omnibus proposal introduces regarding the amount of information supermarkets and other companies can request from suppliers with fewer than 500 employees further significantly reduce the effectiveness of the due diligence processes. By restricting these information flows to what is outlined in the VSME standard (the ‘VSME shield’), supermarkets will likely be unable to obtain crucial information they need to adequately map risks of human rights violations and environmental damage in their supply chains. The VSME standard largely restricts the information on human rights that supermarkets and other companies can obtain from suppliers to a set of simple ‘yes/no’ questions, with limited focus on human rights risks in value chains. This could mean that a supermarket is not allowed to ask suppliers about specific risks, such as deforestation in the palm oil sector, or specific measures a supplier is taking to address these impacts. 

Based on the employee data of 39 per cent of the supermarkets’ suppliers, SOMO estimates that approximately ten per cent of all supermarket suppliers have more than 500 employees. This means that under the restrictions the Omnibus proposal imposes on information flows, supermarkets will not be able to conduct proper due diligence with 90 per cent of their suppliers. 

The harms of the Omnibus restrictions become even clearer when looking at a specific high-risk product for which some supermarkets publish specific supplier information, such as chocolate. None of the 241 suppliers of chocolate products of Aldi Nord, Aldi South, or Superunie are located in cocoa-growing countries. Only 22 per cent of the suppliers of store-brand chocolate products to Aldi Nord, Aldi South, and Superunie will be covered by the CSDDD, meaning these supermarkets cannot rely on most of their suppliers to conduct due diligence themselves. 88 per cent of these chocolate product suppliers have less than 500 employees, which means that supermarkets can only request very limited information from them on the measures they are taking to address issues in their cocoa supply chains. Together, these Omnibus restrictions would severely limit any attempt by supermarkets to conduct meaningful due diligence in cocoa supply chains.

“Simplification” leads to confusion and unclarity

The Omnibus provision, which requires companies to look beyond their direct suppliers only if they possess ‘plausible information’ on negative impacts, will generate significant confusion and reduce legal clarity. It is unclear what constitutes ‘plausible information’ and when a company is deemed to be in possession of such information. As such, the Tier 1 restriction provides an incentive for companies to look the other way from abuses occurring in higher tiers of supply chains, claiming they do not need to act on risks of which they have not seen or heard.

In fact, the Omnibus Tier 1 restriction punishes supermarkets and other companies that do map and assess risks in the higher tiers of their supply chains, in line with the international standards for due diligence. Those companies will be more likely to identify ‘plausible information’ about possible abuses, or already have included such information in their current risk analyses. This would trigger the obligation to take measures to prevent and mitigate those impacts for these companies, while others that choose to simply ignore potential risks will not have to take such actions. Several supermarkets analysed in this article (e.g. Lidl(opens in new window) and Aldi South(opens in new window) ), as well as other companies(opens in new window) in the agri-food and other sectors, currently already map and publish some of their Tier 2 and in some cases Tier 3 suppliers (e.g. farms), which begs the question of why a Tier 1 restriction is even necessary.

The restrictions imposed by the Omnibus package on supplier-buyer information flows create further confusion. The proposal does not make clear whether the VSME restriction also applies to suppliers that have fewer than 500 employees but belong to a larger corporate group with more than 500 employees. It is also unclear why the European Commission makes it possible for companies to request more information than what is stipulated by the VSME standard if this is necessary ‘in light of likely adverse impacts’ or if the standard does not cover relevant impacts, while at the same time it severely restricts the duty of companies to identify these same impacts beyond Tier 1.

European Parliament and EU Member States must maintain the risk-based approach

Instead of obliging large multinational companies to focus on the most severe risks of abuse in their supply chains, the European Commission’s proposed Tier 1 restriction actively encourages companies to ignore foreseeable harms. In the case of supermarkets, this analysis has shown that a Tier 1 due diligence process would not even get close to reaching high-risk suppliers where the CSDDD could make a significant difference, such as farms, plantations, or food product manufacturers further up the supply chain. The vast majority of supermarket suppliers will not be covered by the CSDDD, which makes it even more relevant that the supermarket chains themselves conduct proper due diligence in line with the international norms.

The proposed amendments to the CSDDD achieve the exact opposite of what the European Commission claims to deliver: an ineffective, bureaucratic process that fails to adequately identify and address negative impacts in global supply chains. They create an unlevel playing field between companies that have already invested, e.g., in mapping and addressing upper-tier supply chain impacts or shortening the supply chain, versus companies that have not made such efforts. The Tier 1 restriction also disproportionately affects suppliers with a vertically integrated supply chain compared to those that rely on multi-tiered supply chains.

While supply chain structures differ per sector, the Tier 1 and supplier information restrictions will have similarly harmful effects in many other supply chains, such as those of electronics(opens in new window) , and textiles and garments(opens in new window) . Unless the European Parliament and EU Member States reject these amendments, the EU, while claiming to simplify rules, actually risks converting the CSDDD into a tick-box exercise that fails to make a meaningful impact.

With contributions from Eline Achterberg, Lily Versteeg, and the Data and Research Center(opens in new window) .